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1 1 2 1 UNITED STATES FEDERAL ENERGY REGULATORY COMMISSION 2 3 ------x 4 PRICE DISCOVERY IN NATURAL GAS : Docket Nos. 5 AND ELECTIRC MARKETS : PL03-3-005 6 : 7 NATURAL GAS PRICE FORMATION : AD03-7-005 8 : 9 AQUILA, INC. : ER03-1271-000 10 : 11 B-R PIPELINE COMPANY : CP01-418-000 12 : 13 COLORADO INTERSTTE GAS COMPANY : CP03-7-001 14 : 15 COLORADO INTERSTTE GAS COMPANY, : CP03-301-000 16 ET AL. : 17 : 18 KINDER MORGAN INTERSTATE GAS : RP03-245-000 19 TRANSMISSION LLC :

20 : 21 NATURAL GAS PIPELINE COMPANY OF : RP99-176-089 22 AMERICA : RP99-176-094 23 : 24 NORTH BAJA PIPELINE LLC : RP02-363-002 25 : 2 1 2 1 NORTHERN NATURAL GAS COMPANY : RP03-398-000 2 : 3 NORTHERN NATURAL GAS COMPANY : RP03-533-000 4 : 5 PG&E GAS TRANSMISSION, : RP03-70-002 6 NORTHWEST CORPORATION : RP03-70-003 7 : 8 PORTLAND GENERAL ELECTRIC : CP01-421-000 9 COMPANY : CP01-421-001 10 : 11 TRANSCONTINENTAL GAS PIPE LINE : RP03-540-000 12 CORPORATION : 13 : 14 PACIFICORP : ER04-439-001 15 ------x 16 Commission's Meeting Room, 2C 17 Federal Energy Regulatory Commission 18 888 First Street, N.E. 19 Washington, D.C.

20 21 The above-entitled matter came on for 22 conference, pursuant to notice at 9:00 a.m. 23 24 BEFORE: 25 BILL HEDERMAN, OMOI 3 1 2 1 ATTENDEES: 2 3 Bill Hederman, OMOI 4 Steve Harvey, OMOI 5 Rafael Martinez, OMOI 6 Dave Perlman, OGC 7 Jim Overdahl, CFTC 8 Mike Stzelecki, OMTR 9 Mike Gorham CFTC 10 Ted Gerarden, OMOI 11 Lee-Ken Choo, OMOI 12 Mike McLaughlin, OMTR 13 Dick O'Neill, OMTR 14 15 COMMISSIONERS: 16 17 Sharon Brown Hreska 18 Joseph T. Kelliher 19 Nora Mead Brownell

20 Pat Wood, III, Chairman 21 Suedeen G. Kelly 22 Ric Campbell 23 24 Panelists as listed in the agenda 4 1 2 1 AGENDA 2 3 WELCOME AND OPENING REMARKS 9:00-9:30 a.m. 4 5 William Hederman, Director Office of Market Oversight 6 & Investigations 7 Stephen Harvey, Deputy Director, Market Oversight 8 and Assessment 9 10 Michael Gorham, Director, Division of Market 11 Oversight, Commodity Futures Trading Commission 12 13 Panel 1 -- Reaction to Staff Report and Recommendations for 14 Indices Used in population or Utility Tariffs 15 9:30-10:30 a.m. 16 17 PANELISTS: 18 Bruce Henning, Regulatory and Market Analysis, Energy 19 Environmental Analysis, Inc. (American Gas Association)

20 21 Eugene V. Rozgony, Vice President and Chief Risk Officer, 22 AGL Resources 23 Donald Santa, President, Interstate Natural Gas Association 24 of America 5 1 2 1 APPEARANCES CONTINUED: 2 Alexander Strawn, Proctor & Gamble Company and Chairman of 3 the Process Gas Consumers 4 5 James Allison, Regional Risk Manager, ConocoPhillips 6 7 ISSUES: 8 Should the Commission adopt Staff's recommendation that any 9 index used in a tariff provide volume and number of 10 transactions for each reported price? Should other data be 11 required? 12 13 Are Staff's recommended volumes (25,000 MMBtu/day or 4000 14 MWh/day ) or transactions (five for daily, eight for weekly, 15 ten for monthly indices) sufficient to indicate adequate 16 liquidity? 17 18 Should the Commission require all pipelines and utilities to 19 amend their tariffs by a date certain if indices currently

20 used in tariffs do not meet adopted criteria? 21 22 What conclusions can be drawn for the responses to the 23 Commission's surveys on price reporting? 24 6 1 2 1 ISSUES CONTINUED: 2 How does trading on electronic platforms and price data 3 collected from electronic trading, clearing, and settlement 4 relate to index development and use of indices in 5 jurisdictional tariffs? 6 7 BREAK 10:30 a.m.-10:40 a.m. 8 9 Panel 2 -- Price Reporting, Confidence in Indices and 10 Options for future Commission Action 11 10:40 a.m.-12:15 p.m. 12 13 Scott Nauman, Manager, American Gas Marketing, ExxonMobil 14 Gas &Power Marketing Company (Natural Gas Supply 15 Association) 16 17 Nathan L. Wilson, Vice President, Conectiv Energy (Electric 18 Power Supply Association) 19

20 Michael Novak, Assistant General Manager, Federal Regulatory 21 Affairs, National Fuel Gas Distribution Corporation 22 (American Gas Association) 23 24 Alonzo Weaver, Vice President Operations, Memphis Light Gas 25 & Water (American Public Gas Association) 7 1 2 1 APPEARANCES CONTINUED: 2 3 Jeff Walker, Senior Vice President and Chief Risk Officer, 4 ACES Power Marketing (National Rural Electric Cooperative 5 Association) 6 7 Al Musur, Director, Energy and Utility Programs, Abbott 8 Laboratories and Chairman of the Industrial Energy Consumers 9 of America 10 11 Alexander Strawn, Proctor & Gamble Company and Chairman of 12 the Process Gas Consumers 13 14 ISSUES: 15 What incentives will encourage companies to begin or 16 increase price reporting? 17 18 Are process improvements by reporting companies (public code 19 of conduct, independence source, audit of processes)

20 adequate or are there further improvements that can increase 21 the accuracy of price indices? 22 23 Has industry confidence in prices reported in indices 24 increased to a satisfactory level? 8 1 2 1 ISSUES CONTINUED: 2 3 What steps can be taken to improve transparency of price 4 indices? 5 6 What further information should price indices provide to 7 market participants? 8 9 Has sufficient progress been made under the Policy 10 Statement? 11 12 Should the Commission adopt further requirements for price 13 reporters and/or index developers? If so, what requirements 14 are appropriate? 15 16 Should some form of mandatory report be required? If so, 17 what is the desirable scope of such reporting (Who should be 18 required to report? Should reporting be to existing index 19 developers, to an intermediate or depository, or to the

20 Commission? What data should be required to be reported?)? 21 22 What mandatory report materially improve the qty of price 23 data available to market participants? 24 9 1 2 1 ISSUES CONTINUED: 2 3 Lunch Break 12:15-1:15 p.m. 4 5 Panel 3 -- Index Developers' Response to Industry Views 6 And Staff Report 1:15 -- 2:45 p.m. 7 8 PANELISTS: 9 C. Miles Weigel, Senior Vice President, Argus Media, Inc. 10 Brad Johnson, Global Energy Business Manager, Bloomberg 11 Ernest Onukogo, Manager, Newswire Indexes, DowJones 12 Richard Sansom, Markets Editor, IO Energy LLC 13 Bobette Riner, President, Powerdex 14 Tom Haywood, Editor, Energy Intelligence Group 15 Dexter Steis, Executive Publisher, Intelligence Press 16 Chuck Vice, Chief Operating Officer, 17 Intercontinental Exchange 18 Larry Foster, Global Editorial Director, Power, Platts 19

20 ISSUES: 21 What improvements in data collection and price reporting 22 have index developers seen since issuance of the Policy 23 Statement? 24 10 1 2 1 ISSUES CONTINUED: 2 3 How have index developers responded to the call of greater 4 transparency of indices? 5 6 What plans do price index developers have to provide more 7 information and more transparency to energy market 8 participants? 9 10 Do price index developers meet the standards of the Policy 11 Statement? Did the Staff report accurately depict the 12 extent to which index developers had adopted Policy 13 Statement standards? 14 15 Do price index developers support the criteria propose by 16 Staff for use of indices in jurisdictional tariffs? 17 18 How can price index developers facilitate tariff compliance 19 by pipelines and utilities?

20 21 Will price index developers provide FERC with access to data 22 in the event of an investigation of suspected false 23 reporting on price manipulation? 24 25 Panel 4 -- Market Liquidity 11 1 2 1 APPEARANCES CONTINUED: 2 3 PANELISTS: 4 Martin Marz, Compliance manager, North American Gas and 5 Power, BP America, Inc. 6 7 Christopher Edmonds, Senior Vice President ICAP Energy LLC 8 (Energy Brokers Association) 9 10 Pankaj Sahay, Partner, Energy Risk Management, 11 PriceWaterhouseCoopers 12 13 Tom Jepperson, Division Counsel, Questar Market Resources, 14 Inc. 15 16 Vince Kaminski, Managing Director, Sempra Energy Trading 17 18 ISSUES: 19 Is there adequate trading activity at enough locations to

20 develop reliable price signals for market participants? 21 22 What are the characteristics that make for a good trading 23 hub? 24 12 1 2 1 ISSUES CONTINUED: 2 3 What steps can the Commission take to encourage the 4 development of active trading hubs? 5 6 What role can electronic trading, confirmation/ settlement, 7 and clearing play in improving market liquidity. 8 9 Can improvements in price indices restore confidence in 10 price formation given the present levels of trading? 11 12 Are there standard procedures that can play a role in 13 improving price indices and industry confidence in price 14 formation? 15 16 Audience Questions and Comments 4:15-4:45 p.m. 17 18 Concluding Remarks 4:45-5:00 p.m. 19

20 21 22 23 24 13 1 2 1 P R O C E E D I N G S 2 (9:15 a.m.) 3 MR. HEDERMAN: Okay. Can we take our seats, 4 please. 5 (Pause.) 6 MR. HEDERMAN: Thank you and welcome to the, I 7 guess, fourth chapter in this effort. I want to welcome our 8 colleagues from the CFTC who worked with us from the 9 beginning on this as well. And, also, welcome Chairman 10 Campbell from the Utah Public Service Commission. I hope we 11 can stop meeting like this, at least on this topic. 12 This began as the Commission taking proactive 13 steps to avert a crisis that appeared to be developing on 14 the price formation process for natural gas and to some 15 extent electricity. Thankfully I think we've averted that 16 crisis that we had our eye on initially. 17 Today we meet to seek guidance of affected 18 parties on what the Commission should be doing going 19 forward. Has the crisis merely been postponed, or have we

20 turned an important corner? We're anxious to hear your 21 thoughts on that matter. We are anxious to hear your 22 thoughts on the options that staff has presented to the 23 Commission. And we are also interested in understanding 24 whether the price reporting problems will solve themselves 25 naturally as through improvement of liquidity in the markets 14 1 2 1 and comments on whether that reporting can improve before 2 liquidity improves. So, all of these are matters that we 3 hope to hear your insights on today. 4 We know that all the market participants have put 5 a lot of work into this and to working amongst yourselves, 6 working and communicating with us, and we thank you all for 7 those efforts. 8 We look forward to another fruitful day of 9 exchanging ideas and I'll turn to my key -- 10 MR. HARVEY: Right. 11 (Laughter.) 12 MR. HEDERMAN: Yes, to my key partner here on 13 this, Steve Harvey, to walk us through what we'll be doing 14 here today in more detail. 15 MR. HARVEY: With this being the fourth sort of 16 open meeting that we've had about this issue, it gets to be 17 a little bit of a routine. I usually try to say a couple of 18 things at the beginning, but we really enjoy hearing from 19 you all and we'll try to get to that as quickly as we can as

20 opposed to spending a lot of time doing that. 21 In general I think any statement I would make is 22 pretty fully encompassed in the staff report that we 23 delivered, I guess, at that beginning of May, at this point. 24 There's been plenty of time to look at that. I think it's a 25 good coverage of the issue. I hope so. 15 1 2 1 And I hope that this meeting will be helpful in 2 giving us some good concrete response to this and maybe move 3 the debate forward a little bit as I think some of the 4 previous ones have done. 5 Let me just describe very quickly what the 6 intention is for the four panels today. 7 The first panel was really designed for us to get 8 more direct feedback specifically on the staff reports 9 findings and recommendation. That would encompass the 10 survey results that we have in there, the specific tariff 11 policy recommendations that we have in there about those 12 tariff applications, and then finally the more general 13 public policy options. 14 The second panel really is focused or designed to 15 focus more on those general policy options as laid out in 16 the paper. 17 The third panel, after lunch, will give us the 18 opportunity to hear from the index developers and their view 19 of the status of where things are in this debate.

20 Then the fourth panel is a little bit different, 21 designed to broaden the issue beyond the transparency kind 22 of issues associated with indices and into the area of 23 market liquidity; is there enough activity, in effect, to 24 create prices that are reliable and dependable. 25 Very briefly, what I would like to do is review 16 1 2 1 the four high-level policy options that were laid out in the 2 staff paper. The first was to accept current progress where 3 the Commission would end active involvement with price 4 formation issues and permit the industry to address those 5 issues without any more formal structure or further 6 guidance. 7 The second was to continue to focus attention on 8 the issue where the Commission would actively encourage the 9 industry to implement the policy statement fully and monitor 10 closely the level of trading activity reported by price 11 index developers as well as compliance with the policy 12 statement standards for reporting. 13 The third would be to introduce mandatory 14 reporting where the Commission could move toward some form 15 of mandatory price reporting of energy trade data as a 16 number of parties have urged over the last several months, 17 and, in fact, even in recent comments. 18 And, fourth, encourage greater reliance on 19 platforms for trading, confirmation, settlement and clearing

20 where some parties have observed the most open forum for 21 obtaining accurate price information is trading on electric 22 platforms or some of these other automated efforts where 23 prices can fall out pretty quickly from the information 24 embedded in those. 25 Now, the one thing that has become a bit of a 17 1 2 1 custom for me at the beginning of these meetings is to lay 2 out the rules of the road. And those of you who have been 3 here before will be familiar with many of them, but let me 4 run through them real quickly. 5 We are interested in lively and active dialogue 6 today. So I'm going to ask a few things of the presenters. 7 First of all, panelists will be limited in their initial 8 comments to three minutes in order to cover the principal 9 position or thinking on the issue. I'm going to remind you 10 gently, at first, less so later, if you are running over 11 your time. We need to do that so we can get to the 12 interaction that's proven to be the most interesting part of 13 this. 14 Second, we would remind you that the conference 15 is being broadcast by the Capital Connection, and so it's 16 very important that when you speak you have your microphone 17 on so that people can hear you. 18 Third, material anyone considers germane to the 19 topic of price discovery and electricity or natural gas that

20 we're discussing today should be filed in this docket. And 21 we've tended to keep that open and we're interested in that 22 kind of feedback. Don't know how long that will last, but 23 we continue to be interested. And as always transcripts of 24 today's discussions can be ordered from the court reporter. 25 We're hoping to leave some time at the end of the 18 1 2 1 day in particular for any comments from the audience. But 2 given the number of panelists we've got to go through, it 3 may be a little tough to do much of that during the course 4 of the day. We will do what we can to encourage open 5 dialogue. 6 Now, having said that, I think we should probably 7 move into our first panel. 8 MR. HEDERMAN: Yes. 9 MR. HARVEY: And what we will do is we'll run 10 through the same order as the updated conference agenda and 11 that means we'll start with Mr. Henning. 12 MR. HENNING: Thank you, Steve, appreciate it. 13 My name is Bruce Henning. I'm director of regulatory and 14 market analysis for Energy and Evaluation Analysis, and I'm 15 appearing on behalf of the American Gas Association here 16 today to talk about the Staff Report and recommendations for 17 price indices use in pipeline tariffs. 18 As a backdrop, let me say that AGA believes that 19 the Commission's actions to focus attention on improving the

20 reporting of an indices has been partially responsible for 21 the trend towards improved confidence in the price 22 information. This course of action should continue. That 23 being said, AGA also appreciates the Staff's emphasis that 24 Staff is not evaluating use indices for general contract 25 use. I do not believe that there is a single standard for 19 1 2 1 sufficiency that's applicable for all general business 2 purposes. Each party must evaluate the index in the context 3 of business decisions. 4 Even for an individual LDC, sufficiency will 5 depend upon the circumstances being evaluated. An LDC that 6 is considering a 10, 15, or 20 year contract for the 7 purchase of LNG would have a very different standard than if 8 they're looking at daily, monthly, or balance of the month 9 transactions. 10 In the context of the use of jurisdictional -- of 11 indices in jurisdictional tariffs, I want to make one 12 overarching point. The Commission must not take any action 13 that threatens the viability of an efficient cash-out 14 mechanism, and that mechanism exists today. Cash outs are 15 much more efficient than any other make-up mechanisms and 16 should not be disrupted. 17 That being said, AGA believes that the Commission 18 has correctly identified three key metrics in evaluating the 19 validity of the index and jurisdictional tariffs.

20 Transaction volumes, the number of transactions, and the 21 number of counterparties are all important in evaluating 22 liquidity and in confidence in the index. 23 However, we note the one apparent inconsistency 24 between the language and the executive summary of the report 25 and in the body. The summary refers to a minimum level of 20 1 2 1 activity during an evaluation period, while the body refers 2 to average daily volumes, average number of transactions and 3 average number of counterparties during their respective 4 evaluation period. 5 The language in the body of the report is more 6 appropriate for maintaining the viability of the existing 7 cash out mechanism. 8 Finally, in terms of implementation AGA Is 9 hopeful that the index developers will indicate today in 10 this conference that they'll be able to meet the September 11 1st deadline for compliance with the recommendations. 12 However, even if the index providers meet that deadline, 13 there are significant difficulties with the staff 14 recommendation for the timing and evaluation of all points 15 refer to few in pipeline tariffs. If an index comes into 16 compliance on or near September 1st, the data for the 17 evaluation period may not be available until almost the 18 beginning of December, right in the middle of the winter 19 heating season.

20 Rather than impose an uncertainty in cash out 21 systems at that critical time AGA recommends that the 22 pipelines and their shippers be allowed to propose 23 appropriate solicitations in the context of the Commission's 24 evaluation criteria after the heating season is over. 25 One final comment. After an extremely difficulty 21 1 2 1 period transparency and confidence in price reporting has 2 increased markedly. One factor that contributes to that 3 confidence is multiple independent sources of information 4 that can be corroborated with reported data. My 5 understanding that the Commission staff uses this kind of 6 comparison just to validate the data, just as industry 7 participants do, the existence of these multiple sources 8 adds confidence in transparencies and should not be impeded. 9 Thank you. 10 MR. HARVEY: Thank you, Mr. Henning. 11 Let's go to Mr. Rozgony. 12 MR. ROZGONY: I'm from AGL Resources. I'd like 13 to compliment FERC for their leadership shepherding the 14 industry on these critical issues. 15 In the June issue of Energy Risk Magazine, CFTC 16 Commissioner, Sharon Brown Hreska, was interviewed about the 17 subject of managing manipulation in the energy markets. She 18 was emphatic on one particular point. She said, "It is my 19 view that prescriptive regulation cannot address the

20 problems being experienced by the energy sector, but may 21 exacerbate a liquidity shortage by unnecessarily imposing 22 costs on industry participants and create regulatory and 23 legal uncertainty." 24 Again, she repeated, "let me be clear, I mean to 25 sound an alarm here. These markets are vital to ensuring 22 1 2 1 cheaper, less volatile energy resources. Overly 2 prescriptive requirements for market transparency or 3 mandatory transaction reporting could do harm, raising costs 4 without direct benefit." 5 Let our company, AGL Resources be an example of 6 her contentions. The question we asked ourselves at our 7 company was how do we best serve our shareholders and the 8 best interests of our industry at the same time. 9 We have been very judicious within our company 10 evaluating our approach to price reporting from the 11 frontlines up to the board level. We determined that there 12 are two primary goals for our company regarding the issue of 13 price reporting. First, make the most empirically, logical, 14 economic financial decision in the best interest of our 15 shareholders. 16 Second, support the industry and markets by 17 facilitating a solution that provides both new discipline 18 and vision. 19 With regard to the first goal, our 2004 annual

20 report tells our shareholders that to us no opportunity is 21 too small. We focus on the bottom line, the top line and 22 every line in between. An enormous and burdensome de facto 23 tax has been levied on corporate America with new 24 Sarbanes/Oxley and corporate compliance rules. Every 25 company is suffering through this process and financial 23 1 2 1 expense. Additionally, in the energy sector, the issues at 2 hand also bring with them new burdensome processes and 3 financial expense. 4 We would have to go through a costly and rigorous 5 process to export price data so that another company can 6 financially benefit. These added processes and expenses 7 only serve to provide income to another company, not our 8 shareholders. We don't even get a free subscription in 9 return. 10 We have a fiduciary responsibility to our 11 shareholders, new infrastructure, new process, new 12 governance, new staffing, new compliance all cost money. 13 This is a material, economic fact that we cannot ignore if 14 we are to operate efficiently in the best interest of our 15 shareholders. Although we respect the competitive 16 opportunity of other indices publishers, we do not wish to 17 support the industry by backing in an inferior solution. 18 Especially if that solution creates an economic burden for 19 every company and its shareholders when there is a more

20 efficient alternative. 21 As a company we have decided to contribute to the 22 industry by helping to facilitate a new and better solution. 23 This industry is very fortunate to have these electronic 24 trading platforms in the physical energy markets. No other 25 physical commodity market has the benefits of this solution 24 1 2 1 at this time. 2 With regard to our second goal of supporting the 3 industry, our company executes approximately 85 percent of 4 our next-day transactions on ICE. And we think that is a 5 very significant contribution to price formulation and 6 indices reports that are published by ICE. 7 We also hope in the near future to utilize the 8 value of E-confirm which we also think is a superior product 9 for the industry. I sit on the AGA task force for price 10 reporting reform and have introduced AGA to ICE and helped 11 facilitate dialogue that would better educate the AGA 12 members on electronic platforms as a solution. 13 I have also met several times with ICE executives 14 with regard to these critical issues at hand, and more 15 recently I've met with the new chairman of NYMEX and 16 discussed at a high level the potential solutions that 17 electronic platforms offer to the industry such as ICE, 18 TENEX, E-confirm, and NYMEX Clearport. 19 In sum, we as a company have endeavored in the

20 campaign to bring together the very players of the solution 21 we as a firm believe in. We most effectively assist the 22 industry by supporting the superior solution. We believe 23 options A and D presented in the report are the best 24 solutions going forward. 25 Thank you. 25 1 2 1 MR. HARVEY: Thank you. 2 We would like to move to Mr. Santa. 3 MR. SANTA: Good morning. My name is Donald 4 Santa. I'm the president of Interstate Natural Gas 5 Association of America. I'm here today on behalf of INGA's 6 interstate pipeline members. 7 I'd like to focus my comments on the 8 applicability of the proposals in the Staff policy statement 9 to interstate pipeline cash out mechanisms. 10 It is imperative that the pipeline industry 11 continue to have the ability to reference index prices that 12 bear a close relation to the market conditions at the 13 locations that pipelines and their customers buy and sell 14 gas to resolve imbalances. Why is this important? 15 It's important because a disparity between the 16 location on the system and the index point can create an 17 economic incentive for shippers to go short or long on 18 pipeline imbalances. Let me illustrate this point with an 19 admittedly extreme example.

20 Let's assume that Henry Hub was the index point 21 and that for the New York City region the cash out was the 22 Henry Hub price plus transportation. Clearly, during the 23 winter heating season this price would bear little 24 relationship to the market clearing price for natural gas in 25 New York City. There would be a great incentive for a 26 1 2 1 shipper to short the pipeline. 2 While this example is extreme, it illustrates how 3 a disconnect between the conditions at the index point and 4 the market in which the pipeline and its customers are doing 5 business can affect economic incentives. And given the 6 current high gas prices and levels of volatility, this can 7 add up quickly. 8 What happens if as a result of the disparity 9 between the index and the market the pipeline has an 10 imbalance. Some pipeline tariffs include mechanisms for 11 surcharging shippers for the imbalance, others do not. Some 12 pipeline tariffs allocate the surcharge directly to shippers 13 who cause the imbalance, others use different allocation 14 methods. 15 My guess would be that if the imbalance account 16 levels grow as a result of disconnect between indices and 17 the actual market conditions, this will become a much more 18 contentious issue. 19 Furthermore, as a practical matter, the pipeline

20 is not guaranteed the recovery of the imbalance account. 21 Because of volumes in a subsequent year fall short of the 22 design volumes use for the surcharge. Or if the pipeline 23 moves greater discount volumes than projected, the pipeline 24 could end up short on its collection. 25 Don't get me wrong, pipelines want gas price 27 1 2 1 indices that are accurate. The more accurate the index, the 2 less of an incentive there will be for shippers to go short 3 or long on the pipeline. But pipelines do not want a 4 situation in which the search for the perfect index leaves 5 us in a situation that undermines the workability of the 6 cash out mechanisms in the pipeline tariffs. 7 Second, as highlighted in INGA's written 8 comments, we have got concerns about the workability of the 9 implementation schedule proposed in the staff paper. Staff 10 proposes that effective September 1 from each index location 11 used in a jurisdictional tariff the published index must 12 meet the criteria. It becomes awfully difficult to 13 implement this if we don't know until September 1 whether an 14 index provider qualifies or whether particular index points 15 qualify. 16 I would suggest that the Commission take this one 17 step at a time and allow an adequate interval between for 18 the industry to react to what is established. 19 Finally, INGA suggests that the Commission would

20 need to act under Section 5 of the Natural Gas Act to change 21 existing pipeline tariffs should it wish to proceed. 22 In doing so, the Commission must show that the 23 pipeline's current cash out point is no longer just and 24 reasonable, and also that the substitute that it prescribes 25 is just and reasonable. Should a number of cash out points 28 1 2 1 fall away by application of the Staff's criteria and the 2 pipeline is required to cash out at a distant point from its 3 market, it's not clear that the Commission could justify the 4 substitute point as being just and reasonable. 5 This I think also reinforces a point that there 6 really are not and have not been serious complaints about 7 the use of indices in pipeline cash out mechanisms. 8 Consequently I would suggest that a prudent approach would 9 be for the Commission to apply its criteria in the event 10 that there is a complaint about a particular pipeline's cash 11 out, or if a pipeline comes to the Commission to modify its 12 cash out. There does not appear to be a strong 13 justification for acquiring an across-the-board revision of 14 pipeline cash out mechanisms. 15 MR. HARVEY: Thank you. 16 Mr. Strawn. 17 MR. STRAWN: Good morning. Thank you very much 18 for the opportunity to speak. My name is Alexander Strawn. 19 I oversee all of the physical contracting of gas for Proctor

20 & Gamble in North America. I also happen to be sitting here 21 today representing the Process Gas Consumers Group otherwise 22 known as PGC. We are an active trade association of 23 industrial gas consumers who require natural gas in most of 24 our key operations. And we have a broad cross-section of 25 membership representing just about every single business 29 1 2 1 entity in the United States and we consume over half a TCF 2 of gas annually. 3 We work generally to promote a coordinated and 4 rational and consistent approach to federal and state 5 policies in reaction to natural gas supply and demand. 6 In general I am very pleased to report from our 7 membership and the cross-section of companies that I 8 represent that we have a high level of confidence in the 9 price indices as they are standing today. And as indicated 10 in the May 5th staff report, industrial confidence is at a 11 level of 7.43 on a scale of one to ten. All of our members 12 pretty much reflect that same level of confidence and we are 13 very pleased to report that to FERC today. 14 As shippers on interstate pipelines across the 15 grid, Process Gas Consumers is very familiar with the use of 16 indices and tariffs to calculate such things as penalties 17 and cash out and has been very active in negotiation of 18 pipeline cash outs and penalties in general. 19 In the event that the Commission determines that

20 certain indices or points cannot be used in jurisdictional 21 tariffs, PGC has some concerns about the implementation of 22 the Commission's new policy which I'll detail later in the 23 Q&A. 24 And, finally, we believe that competitive, 25 multiple sources of reporting are vital to a consistent and 30 1 2 1 healthy market, introducing new indices that perhaps bring a 2 note of uncertainty to markets that are already challenged 3 and supply and demand is not a path that we prefer to go 4 down at this point. 5 Thank you very much. 6 MR. HARVEY: Thank you. 7 Mr. Allison. 8 MR. ALLISON: I am Jim Allison with 9 ConocoPhilips, where I am the regional risk manager for gas 10 and power traded activities in North America. 11 Let me begin by congratulating the Staff for the 12 wonderful work they have done getting the survey out, 13 getting the survey analyzed and producing the report. I 14 understand that none of the survey results were in ahead of 15 schedule and a tremendous amount of work got done in the 16 roughly 30 calendar days, which turned into, I guess, 30 17 working days also before the report came out; 300 pages of 18 SAS tables, and 60 some pages of text describing the results 19 is a very impressive accomplishment.

20 Bill, in his opening comments, asked whether the 21 corner has been turned. I would suggest that it has been. 22 There are many causes for that. I would highlight one thing 23 as a triggering event and that would be the guidelines that 24 the Commission issued last summer. I think revolution is an 25 appropriate term to describe what that accomplished in the 31 1 2 1 price reporting practices. 2 Once upon a time price reporting was done by 3 traders very informally. Now price reporting is done out of 4 our system it is done by the risk management or other mid- 5 office people. It is a professional, auditable process that 6 one can fairly hold up the light of day. And I believe that 7 has resulted in a tremendous change. 8 As with most revolutions consolidation of the 9 benefits is taking longer than declaring a revolution. And 10 we see that in the survey and the rate at which volumes are 11 coming back in which people reporting are coming back to 12 business. Even with that, for the October to February time 13 frame the data and the report, I believe, strongly support 14 the notion that people (a) express confidence in the 15 indices, and (b) back that up with their capital by using 16 the indices. 17 I can comment at more length upon my reading of 18 the data but the people out there are in fact using indices, 19 on average, about 62 percent of the volumes transacted are

20 priced off indices. So a very large number of capitalist, 21 profit-driven companies have put capital at risk using the 22 indices. They would not do that if we didn't trust them. 23 This is backed up by the statements from our 24 customers. Our customers who are consumers of gas, like 25 Alex, are not happy with the level of price. If you are a 32 1 2 1 gas consumer, $6 gas is not good news. They are, however, 2 telling us that they are by and large happy with the 3 indices. And, in fact, my traders tell me that with the 4 current level of high prices we see customers choosing to do 5 business on an index basis rather than a fixed-price basis. 6 At the current price level they do not wish to take the 7 fixed-price risk, they choose to use indices instead. 8 Again, if they were not confident in the indices, 9 they would not make that decision. We would be happy to do 10 the business with them on either pricing formula. 11 The other question, I think, is where do we go 12 from here? The Commission articulated four options. I 13 think the staff wisely highlighted the costs and risks 14 associated with mandatory reporting. I believe that would 15 be a grave blunder for the country to move into at this 16 point. I'll not amplify on the comments that the staff had 17 in their report. I think you did a good job covering the 18 implementation difficulties and costs that would bring. 19 Neither do I think we can simply declare victory,

20 close up shop, and move on to everything else. I believe 21 the market is way too important to American consumers not to 22 have some degree of continuing oversight. And I believe 23 that is part of the Commission's role. Other reports, other 24 suggestions were with respect to the use of the electronic 25 platforms. I'm a big fan of electric platforms. From a 33 1 2 1 risk manager's perspective, they make my life much easier, 2 partly because they're standardized, they're transparent, I 3 get good information and because they're electronic, I have 4 a prayer being able to automate data feeds which reduces my 5 costs. All of that is good. However, roughly half of the 6 business done in both the day-ahead and the bid-week market 7 is done directly bilaterally with customers rather than over 8 electronic platforms partly because the customization, the 9 customer's desire, one of the strengths of electronic 10 platforms is the standardization of contracts. But when you 11 are trying to meet the needs of a customer, that is also one 12 of the weaknesses of electronic platforms. 13 I don't believe the Commission needs to do 14 anything beyond what it has already done to encourage us to 15 use platforms where they are suitable for the task. We like 16 the benefits of platforms, they make our lives much easier, 17 but they are not always the right tool for meeting the 18 customer's needs. 19 One other issue I would raise in terms of our

20 path forward, in terms of what changes in the system really 21 would add substantial value. And the one issue I would 22 highlight for the Commission would be something that helps 23 us address the credit problem. We have come to realize, 24 somewhat belatedly, how much economic capital is absorbed 25 through credit exposure. Once upon a time we had grossly 34 1 2 1 under estimated that parameter and some companies that are 2 no long with us are not with us because of that problem. We 3 have had lots of discussions about tools to address the 4 credit issue. I think there are a couple of things the 5 Commission can do to help push this forward and a couple 6 things the Commission should refrain from doing because it 7 would get in the way. 8 Among the things the Commission should refrain 9 from, I think the Commission cannot be in a position of 10 decreeing the solution. I don't think we know what the 11 answer is yet. So I don't think the Commission ought to be 12 imposing a credit solution at this time. In particular I 13 know there have been some groups out there who have been in 14 effect asking for monopoly licenses for particular 15 solutions. I think that would be a mistake; (a) I'm opposed 16 to monopolies; (b) I'm not convinced they got they've got 17 the right answer. 18 On the affirmative side, I think there are a few 19 things the Commission could be doing that would be extremely

20 helpful. First, your influence with the state regulatory 21 groups could be very helpful in having the states recognize 22 that the credit issue really is a broad national issue, not 23 a local state issue. And that the proper solution of the 24 credit issue needs to have all of the participants in the 25 market as part of the solution, not focused on one sector of 35 1 2 1 the industry. 2 Some of the state public utility commissions 3 have, partly because of who they regulate, tended to focus 4 on one segment of the market and have missed other segments 5 of the market. 6 I think the Commission could play a very helpful 7 role helping to guide the public utility commissions and 8 seeing this as part of the national issue and getting all of 9 the players into the credit solution rather than just one 10 side of the market. 11 We have had lots of hopes for mechanisms such as 12 clearing. They have come to pass more slowly than one might 13 have hoped. Although the growth in the NYMEX Clearport 14 contracts has been very encouraging. We have had lots of 15 hope for things like margining and netting agreements. 16 Those two are coming to pass more slowly than many of us 17 might have hoped. 18 I don't know that we know what the right answer 19 is. I think the market is more slowly than I would like,

20 but I think the market is evolving toward a solution. And I 21 said, there are a few things the Commission can do that will 22 help the market evolve toward a good solution. I think this 23 is not the time to decree what that solution would be. 24 I am happy to address the details of the report 25 later on. 36 1 2 1 MR. HEDERMAN: Thank you. I'd like to start with 2 a question for Mr. Rozgony. You were talking about the 3 immense costs that might come with a mandate. Have you done 4 any ballpark estimates of those costs? 5 MR. ROZGONY: (Off mike.) I couldn't give you a 6 number, but I did determine that -- I'm sorry. I don't have 7 any specific numbers. But we did determine that we would 8 have to hire new employees. We did determine that we had to 9 reengineer our systems. We did determine that we would have 10 to involve our legal department to a greater degree through, 11 you know, new compliance requirements around this issue. 12 So when you add all those up, just intuitively it 13 is an expense. I don't have a specific number, but I would 14 say that it's material, it's when we are evaluating some of 15 our smaller subsidiaries. It's a material effect. 16 So, quite simply there is clearly an expense and 17 there's clearly a savings by the fact that we are actually 18 saving money by utilizing the electronic platforms because 19 there's no burden of exporting data. You know, it's

20 directly, we don't even calculate. I mean, we don't do 21 anything. Our consummated transactions which are 22 approximately 85 percent of our transactions get captured in 23 their -- I'll call it a clearing mechanism, it's not exactly 24 a clearing mechanism, but -- and combined with the E-confirm 25 product and produce just very efficient weighted average 37 1 2 1 calculations that, you know, I don't think anybody can argue 2 are the most auditable real-time solution out there. So we 3 see that not only does it benefit us, but it also produces 4 the best result. 5 Did that answer your question? 6 MR. HEDERMAN: Yes, thank you. 7 Steve. 8 MR. HARVEY: I'd like to ask and maybe several of 9 you, but in particular Mr. Henning and Mr. Santa, help me a 10 little bit just kind of lay out the implications in effect 11 of not being able to use the indices for these cash 12 balancing mechanisms. Some of the mechanics of -- you know, 13 on the one hand we've got some timing issues that you've 14 expressed concern about. On the other we do have -- you 15 know, there is potentially a threshold where an index is not 16 sufficiently good to be used in that case. 17 What is in effect the next best solution and what 18 are sort of the consequences of not being able to do it 19 through cash balancing mechanism? Just draw me a sort of

20 mental picture of this thing a little bit. 21 MR. HENNING: Well, I think for the mechanism to 22 work, and for it to be efficient as it is now, it's got to 23 reflect the value of natural gas within that particular 24 market area. In other words, to be a mechanism where it is 25 tied in there. 38 1 2 1 I think that when you look at the issues, you're 2 going to find that with a variety of different data sources, 3 you can find indices that will reflect the value of natural 4 gas in those market areas on those pipeline systems. Now, 5 does that match up with every one according to this 6 efficiency criteria that's proposed in the Staff Report? 7 No, maybe it doesn't. But there will be a mechanism to 8 identify those and the pipeline and the shippers should have 9 the time to be able to go forward and find those particular 10 things. 11 In the absence of that, there is a risk that you 12 will have a gap where you won't have a viable cash out 13 mechanism and that's what I think we're looking to try to 14 avoid. 15 So I think that the issue of timing in terms of 16 how you go about identifying those solves the problem that I 17 think you're referring to which is, you know, what happens 18 in the absence of any viable measure of the value of gas on 19 the pipeline system at that point.

20 MR. SANTA: I would add that if you had a 21 situation where you could not use an index and you were 22 forced for purposes of that you -- then could you do a cash 23 out. Good question. If you couldn't do a cash out, then do 24 you go to resolving imbalances with in-kind payments of gas? 25 Which I think would be much less efficient and potentially 39 1 2 1 could create operational problems for the pipelines. For 2 example, if someone did not resolve their imbalances 3 promptly and increasingly got out of balance, how do you 4 penalize that customer and give them an incentive to get 5 back into balance. 6 Also, to the extent that the imbalances went 7 toward the side of the pipeline being short gas, the 8 pipeline increasingly would have to draw upon its line pack 9 or other sources of gas to operationally meet the delivery 10 requirements. Which then at some point compels the pipeline 11 to have to go the marketplace and become a purchaser of gas 12 to replenish that line pack. 13 And, again, as you have a situation where 14 customers would get increasingly out of balance, the pipe 15 would go back to being more and more involved in the 16 commodity end of things by having to go out there and become 17 a major purchaser of gas or quite frankly if things went the 18 other way possibly a seller of gas. 19 And while the pipes do some of that activity

20 today, it is very, very de minimus. It's like you got a 21 threshold question, do you want to put the pipes back in 22 that role. And I think it's a reason why you would want to 23 try to find a viable means to have, as Bruce said, some 24 indicia of what is the market price of gas in those markets 25 where the pipes are doing business. 40 1 2 1 The other point I would make is I know that the 2 staff paper drew the distinction between the use of the 3 indices and the pipeline tariffs, and the commercial use of 4 the indices. And in the commercial use of the indices it 5 talked primarily about it in bilateral transactions. But, I 6 mean, I think the other thing here, the part that that 7 missed, and what I think was probably one of the real 8 drivers as to why this became such a great issue was the 9 fact that within restructured power markets and if the gas 10 generators were at the margin, and if the price of gas is 11 what is largely driving the incremental price of power, the 12 concerns that if there was a distorted price of gas that was 13 reflected there, it would translate very concretely into the 14 electricity prices. 15 And I think that's a problem of kind of a whole 16 different order of magnitude than the concern about pipeline 17 cash out mechanisms and the accuracy of the indices where 18 the volumes and what is at stake are far less. And also 19 quite frankly it's an area where while pipes and their

20 customers may fight about the cash out mechanism and the 21 context of a tariff proceeding and all the intricacies of 22 it. It was not something over which there was a major human 23 cry that something was out of whack that was adversely 24 affecting the market or consumers. 25 MR. PERLMAN: Can I ask a really quick follow-up 41 1 2 1 question to both of you? 2 When the staff proposed those criteria and tried 3 to be sensitive to the issues you're talking about and try 4 not to cause problems for existing pipelines, thinking that 5 many of the tariff provisions that use cash outs today based 6 upon indices would not be affected. Have you gone back or 7 your members gone back and looked at whether there really is 8 a problem if the staff's criteria where adopted, would there 9 be issues with existing tariffs that would cause the need to 10 make changes? Or would most of them, if not all of them be 11 found to have met that criteria? 12 MR. SANTA: Dave, I'm not sure to say we've done 13 it exhaustively. However, INGA and its members have gone 14 back and looked at it. One of the questions we have has to 15 do with kind of some of the ambiguities about how the 16 criteria would be applied. Because, for example, there are 17 individual days when a particular point on the daily basis 18 may not have either the requisite number of transactions or 19 requisite volumes to qualify.

20 Well, how is the Commission going to treat that 21 for whether or not the point on the whole qualifies? Are 22 you going to look at it over that 90-day period and somehow 23 average it in a way that will recognize that maybe on 24 isolated days it may not comply? Or is this going to be a 25 case of if you don't meet it on one day or you don't meet it 42 1 2 1 on a handful of days it's out. So I think that, you know, 2 some of that in terms of the details as to how those 3 criteria will actually be applied, I think will affect the 4 degree to which a number of points -- significant number of 5 points drop out. 6 MR. PERLMAN: Well, we'll assume that you can 7 make the conclusion that it would be the average rather than 8 the specific day. 9 MR. SANTA: If it is the average, it is -- I 10 think it would be much less problematic. However, I can't 11 say that -- you know, we've gone back and have exhaustively, 12 you know, analyzed it to see how many will drop out if you 13 did it on the average versus the isolated basis. I can say 14 that on the one thing that did come through from our looking 15 at it was that with respect to -- rather than the daily, the 16 monthly, to the extent that there is any reference to the 17 monthly, there are far fewer points that will qualify using 18 the monthly criteria. 19 MR. HENNING: One thing that we did and tried to

20 take a look at the particular issue was we just for the sake 21 of the ease of downloading the data, we actually looked at 22 all of the points reported by ICE and looked at the daily. 23 And applying a rolling 90-day average period, the vast 24 majority of those points, although there are few in the 25 daily market that would meet the proposed criteria. Now, AJ 43 1 2 1 member companies differ as to whether or not that is the 2 exact correct criteria. And I'm not taking a position on 3 that. But just illustratively on the daily most of those go 4 and pass. 5 If you were to apply the minimum threshold 6 interpretation then over half of those points drop out. So 7 there's a significant difference in terms of the 8 interpretation there. 9 Many more of those points are problematic from 10 the perspective of a monthly contract. And so there may 11 well be some points that at the end of the day don't meet 12 that criteria and you're going to have to have the time 13 available for the pipeline and the shippers to evaluate that 14 data and propose what alternatives might be appropriate. 15 MR. STRAWN: If I could make one other comment, 16 too. Just in general I kind of echo the same sentiments 17 here. Any time you're going to bring another level of 18 uncertainty to the cash out provision for these supposedly 19 less liquid points, you're going to cause more complexity to

20 the overall system, more challenge, more potential 21 litigation, more protracted analysis of those points, and 22 more involvement by all parties in an area that largely 23 hasn't been in great dispute. 24 And if you throw it into that level of 25 interaction, then what's likely to happen is you will have 44 1 2 1 more and more individual negotiation that goes on and maybe 2 even less reporting of what actually those points will be. 3 Because most of the discussion will be with the two parties 4 involved. 5 Right now, at least you have the liquidity 6 associated of what's reported even though it may not meet 7 the test of what you consider to be actively liquid. But 8 bottom line it adds more complexity and more challenge of 9 the parties involved. 10 MR. PERLMAN: But just to be clear, I thought I 11 heard Mr. Henning say that it was important that the tariffs 12 have an index, if there is an index used for cash outs, that 13 it have some meaningful relationship to the location. 14 And I think the question that we would have is 15 how do we validate that if the index is usable, and meets 16 the criteria the Commission can use to say it's just and 17 reasonable, and I'm hearing, maybe I'm mischaracterizing, so 18 I'll ask you to explain that. If it didn't meet whatever 19 criteria that we were to establish, it would be the next --

20 Steve was, I think, implying -- the view I'm hearing is that 21 the next step, the uncertainty or the in-kind type of issues 22 are more material than having a problematic index. So we're 23 sort of stuck with trying to do the best we can with the 24 indices that we have because the next best is worse. Is 25 that a fair characterization, or am I overstating the issue? 45 1 2 1 MR. SANTA: I think it goes to the point that I 2 made earlier about if, you know, as Mr. Strawn just said, 3 you know, even if it maybe doesn't precisely meet it, 4 depending upon how you apply it, but nobody is really seeing 5 themselves as being at a disadvantage in the marketplace. 6 And that should be a strong indication that there's not a 7 problem and there really is not a need to say to the 8 pipeline you must come in and amend your tariff and either 9 use a point that meets the criteria or go to some 10 alternative. 11 You know, by the same token, if those who are in 12 the marketplace and dealing with this in the context of the 13 cash out don't have confidence in that point and want to 14 come to the Commission and say, you know, please make the 15 pipeline revise its tariff so as to get in a point that 16 meets the criteria, then as I suggested up front, you know, 17 that would seem to be a prudent approach where it would 18 address a problem to the extent that it was a problem. And 19 yet not create potentially complexity and contention where

20 there isn't one. 21 MR. HENNING: On point, the AGA member companies 22 who have looked at this, as I said, believe that the 23 Commission and staff has correctly identified three 24 important metrics. And so if in fact, we move forward, and 25 I hope we'll hear this afternoon, the index providers can 46 1 2 1 provide information on volumes, numbers of transactions and 2 numbers of counter parties, that information is going to be 3 available and you're going to look at that and you can 4 determine whether or not you're using an appropriate index; 5 and if not, then you talk to your pipeline in terms of how 6 it can go forward. 7 I think that that's going to be a positive step 8 in having that information out there. But it's the issue 9 and uncertainty that would be created by a time schedule 10 that would imply that you wouldn't know that at the time and 11 be able to approach your pipeline and come up with the most 12 appropriate workable solution. I mean, once that 13 information is out there, analysts such as myself and the 14 member companies are all going to be looking at it just as 15 the Commission will. 16 MR. STRAWN: One final point, if I may add it. 17 And that is that particularly if we were to look at this in 18 a more exacting way and not use those points and apply it 19 retroactively where you have some cases that are pending,

20 that would just cause unbelievable confusion and 21 consternation amongst the people and the parties that are 22 involved. And for that reason, if nothing else, we would 23 favor continuing monitoring and just some type of ongoing 24 evaluation as opposed to a definite move toward elimination 25 of those points. 47 1 2 1 Thank you. 2 MR. STRZELECKI: A question for Mr. Henning, a 3 follow-up question. 4 If a pipeline determines that an index point does 5 not comply with our criteria, you said then there is this 6 process that goes to value what your next step is. Transco 7 in their comments, I believe, called it the transition 8 process and they recommended a 60-day timeframe to do this. 9 What timeframe do you need to find another point that 10 qualifies or another solution to the problem? 11 MR. HENNING: I think it's hard to say that 12 there's a particular number that will always be there. And 13 I think that obviously it's going to have to deal with the 14 individual specifics of that pipeline system and identifying 15 an appropriate index that reflects the value of gas at that 16 system. 17 I think a concern is whether or not in the 18 process that's contemplated here, doing all of that for all 19 of the points on all pipelines in a time period that's

20 putting you over the winter heating season. And so the 21 recommendation is let's go forward, get the appropriate 22 metrics out there to the greatest degree possible, the 23 information, and allow that -- the shippers, the LDCs, the 24 pipelines, all other shippers on the pipeline to get 25 together and figure out what that is after the winter 48 1 2 1 heating season. 2 MR. STRZELECKI: Okay. And just one more 3 follow-up. In the Staff Report we recommended or threw out 4 a September 1st implementation date for the criteria. And 5 some pipelines and commenters had problems with that. What 6 would you recommend as a reasonable implementation date? I 7 think National Fuel said June of 2005 after the heating 8 season and such. What would you guys recommend? 9 MR. HENNING: Within the membership there's no 10 particular date that they agreed upon at that. So I can't 11 give you a particular date there. Again, though I'd say 12 what I am hopeful is we'll hear, and frankly the local 13 distribution companies can't know what the index providers 14 are going to say, we'll hear that later, what we're hopeful 15 is that we'll start getting that data and be able to look at 16 it with all of the elements of the metric that are being 17 recommended on or about September 1st. We are already 18 seeing some improvements in terms of the information. We've 19 got more data now to analyze than we did a year ago, and

20 that's a very positive movement. Part of it because the 21 industry did step up in the process making their own 22 recommendations and the Commission is adopting those 23 recommendations as well through the CCRO process and the 24 Commission's actions on it. 25 So I think we're moving in that direction. And 49 1 2 1 hopefully by September 1st we'll be able to get that 2 information from all the index developers. 3 MR. STRZELECKI: Okay. Thanks. 4 MR. ALLISON: Let me add a comment on that, if I 5 may. The view of this panel is that the cash out process is 6 by and large working pretty well right now. As we implement 7 new criteria, we therefore need to be a little bit careful 8 that if the criteria result in rejecting particular points, 9 in contrast with the current view that the market actually 10 is working pretty well, most of those rejections probably 11 should be viewed as highly likely to be false negatives in 12 the sense that the criteria have said an index is not good 13 when in fact the market has said it is good. 14 We haven't seen all the data. Therefore, we 15 don't know what the data will show. There has been some 16 analysis done that is generally encouraging. But I think 17 the fair statement is, anything implemented September 1 18 probably should be viewed as tentative. And we need to 19 evaluate how it actually works in real life.

20 If the criteria, whether it's average or minimum, 21 whether it's 90 calendar days versus 90 trading days, if the 22 criteria result in rejecting lots of points, then the 23 criteria, I think, by definition have been set too strictly 24 and will need to be modified. 25 I don't know that it is possible to know ahead of 50 1 2 1 time what the right criteria are, because there are all 2 these unintended consequences from it. 3 So I would suggest that viewing a September 1 4 date as a tentative, perhaps experimental period, in the 5 market April 1 is traditionally viewed as the beginning of 6 the summer trading season, June 1 is a time when volatility 7 typically is low. I don't know that there's anything 8 magical about either of those as a target date for a more 9 permanent -- and in fact "permanent" probably is way too 10 strong a concept for any of these things, but we do need to 11 be very, very careful to watch out for the false negatives 12 from whatever criteria are established. 13 MR. O'NEILL: Could I ask you to clarify what you 14 mean by -- you said, "a false negative is good" or that the 15 "index is good". What do you mean when you say an index is 16 good? 17 MR. ALLISON: By a "false negative" I mean, the 18 result that applying the criteria means that an index would 19 be rejected as not allowed for the purposes of cash outs.

20 That is a false negative if the market has formed the 21 opinion that that index actually is quite useful for the 22 purposes it's being used for, cash outs, trading, other 23 things. There may be particular markets where the indices 24 are viewed as highly reliable. Even though they fall short 25 of the kinds of criteria that have been set. We simply 51 1 2 1 don't know yet. But the market has had a fair amount of 2 experience dealing with these things and has evolved toward 3 particular patterns of use. 4 As previous speakers have said, there hasn't been 5 a tremendous human cry about the cash out process. So the 6 evidence by and large is that the indices that are currently 7 being used seem to be working pretty well. So I think there 8 is probably a presumption that they are good for the 9 purposes for which they're being used. 10 MR. O'NEILL: I understand that. But I mean, I 11 don't know what it means to say, working well and good. I 12 mean, yes, they work well because they provide people a way 13 to calculate cash out numbers. They really work well 14 because there's a number there and you can cash out on that 15 number. But how good is that number? Is it just and 16 reasonable? 17 MR. ALLISON: It is used without objection by 18 parties that have alternatives both for cash outs and for 19 sundry other commercial transactions.

20 MR. O'NEILL: And you are proposing that as our 21 standard? 22 MR. ALLISON: And I recognize that standard has a 23 lack of objectivity that makes it difficult for the 24 Commission to use only that. And I therefore recognize why 25 you want more numeric standards such as the ones proposed. 52 1 2 1 My cautionary note is that when we observe a conflict 2 between these numerical criteria and the actual market 3 behavior, we need to be very careful before we say that the 4 numerical criteria are right and the market behavior is 5 wrong. 6 And I would suggest that in most cases the market 7 behavior will have been correct and we ought to give strong 8 consideration to the possibility that the numerical result 9 is, in that sense, a false negative. 10 MR. O'NEILL: Yes. I don't want to be 11 oversimplifying, but I guess is the answer, if both parties 12 are happy, we should be happy? 13 MR. STRAWN: I would say that. And I would 14 certainly indicate that -- echoing Jim's sentiments -- that 15 if you throw it into some level of uncertainty, that's the 16 worst thing that can happen to industrials. Because most of 17 the time these types of discussions are held up front or on 18 an ongoing basis. And there's an understanding and 19 acceptance of what's there. Even if there is some question

20 later about the liquidity, most of the -- as mentioned by 21 the Commission, most of the people involved in these 22 transactions and understanding the method of cash out, have 23 already agreed on these points up front, and they understand 24 whatever implied volatility there is there. 25 But if you start to introduce -- again, I have to 53 1 2 1 say, this over and over again, if you start to introduce 2 uncertainty in September or October or whatever time you 3 prefer to introduce these potential indices changes, that is 4 what concerns industrial consumers. Because anything that 5 heightens volatility is what we worry about, overall 6 volatility. And by actually doing this, and in the 7 Commission's view think that you're clarifying, you may 8 actually add potentially to the volatility. And that 9 bothers us. 10 MR. CHOO: I seem to hear the sentiment that 11 maybe things are all right and we don't need to have any 12 criteria. And we want to just use the complaint process, 13 whatever the criteria may be, to settle any disputes. Is 14 that the indication I'm hearing from most of the commenters? 15 MR. ROZGONY: The only thing I would add is just 16 to answer your question, yes, if both business parties are 17 happy in the transaction, that's a pretty good thing. If we 18 can get to that point I think there's a lot of success in 19 the business overall.

20 Two parties happy in a business transaction is an 21 accomplishment. 22 MR. HENNING: Another thing I would add just as 23 well is at the same time the Commission's actions that are 24 moving towards more information being available for all the 25 parties to evaluate that, also then improves the result when 54 1 2 1 you have both parties being happy. And in getting the 2 appropriate metrics, having the volume of transactions and 3 counterparties available is going to help. 4 MR. HEDERMAN: Mike McLaughlin, you had a 5 question. 6 MR. McLAUGHLIN: I can understand the unease 7 about potentially calling into question the existing indices 8 that have been adopted in the Commission's tariffs and the 9 uncertainty that would bring about the review of those to 10 apply them to the staff standard, and, you know, the debate 11 about the timing of when that would be done or should be 12 done. But, what about the idea of applying the staff 13 standard to new filings? Because unlike being already in 14 the tariff, we do not control when companies or pipelines 15 make new -- you know, filings to incorporate new indices 16 into the tariffs. You know, we've experienced that over the 17 last number of months. 18 Does the idea of applying the standards proposed 19 to new filings cause you heartburn?

20 MR. SANTA: As I mentioned in my comments, Mike, 21 I don't think it causes a great problem for the pipeline 22 industry. And I think it's a more prudent approach than 23 effectively ordering all pipelines to come in and file and 24 also, as I said, you know, to the extent that there were a 25 dispute where a shipper or some party felt that the index 55 1 2 1 point along the pipeline was not indicative of the market 2 conditions, it would seem to be a good starting point for 3 evaluating a complaint. 4 MR. STRAWN: I think I would have less concern -- 5 I have overall concern with any change in this area, but I 6 would have less concern on a future basis as opposed to 7 retroactive. But just overall, I think I have to mention 8 Jim's comments again, and the fact that if you want to take 9 a step in this area, maybe a slow evaluation step, or a 10 slower evaluation step, as opposed to a mandate, it will be 11 this way immediately. Even in future markets would probably 12 be more advisable from our point of view. 13 Because, again, every step you take adds to 14 volatility. And as people understand what you are trying to 15 do and understand that you are actually trying to help the 16 overall situation by adding liquidity and understanding of 17 the market, I think there's less concern and less 18 possibility for suing. So I guess I would say, I'd give 19 that a tentative agreement that at least evaluation of that

20 aspect would be preferred to certainly any retroactive or 21 concrete minister. 22 MR. HENNING: Where the pipeline is getting ready 23 to make a new filing, in most instances this happens and in 24 all instances I think it should. There will be a 25 communications between that pipeline and the shippers. When 56 1 2 1 the information that we are talking about is available in 2 terms of volumes, transactions and counterparties, the 3 shippers and the pipeline will be looking at that 4 information and figuring out what particular points should 5 be referenced in that tariff. 6 So I think going forward what you will see is on 7 the basis of having more information out there, you're going 8 to get requests that make more sense in terms of having the 9 gas valued appropriately in the market place. And that 10 should help you. 11 MR. ALLISON: I'm a bit uneasy about any set of 12 criteria until we've had a chance to see how they actually 13 function in the real world. If we have an opportunity to 14 observe how well they function and tune the criteria which 15 might imply making them less rigorous, might imply making 16 them more rigorous. But if we have the chance to tune the 17 criteria, then after they've been tuned, I don't have any 18 inherent objection to using them on new filings. But I do 19 think the opportunity to tune the criteria so that they do

20 what they are designed to do and intended to do is 21 important. 22 MR. PERLMAN: Can I just ask a final question on 23 this to make sure that we're all on the same page. If we're 24 looking, the Commission has to address new filings and make 25 judgment whether the filing is just and reasonable in all 57 1 2 1 respects. And I want to make sure I'm not misunderstanding, 2 is anybody suggesting that if there is a filing and an 3 element of it is not contested, that the Commission should 4 not make an independent review, but just accept it by virtue 5 of the fact that it's not contested and the lack of contest 6 would make it per se just and reasonable? Is that what 7 you're saying? 8 And if you're not saying that and the Commission 9 has to take some sort of independent review to validate the 10 use of it in the tariff, if we don't have standards such as 11 these, or some other way to look at these things to make a 12 judgment, what should we do? Because we need a basis to act 13 from and I at least think, as a legal matter, we probably 14 need to make our own independent judgment and not just rest 15 on the lack of contest to say that the filing is just and 16 reasonable as a matter of law and fact. 17 MR. ALLISON: You need to be careful to count the 18 number of negatives in any of these statements here. 19 (Laughter.)

20 MR. ALLISON: I was not suggesting that the 21 Commission abdicate its responsibility to make an 22 independent review. I was suggesting caution in how we 23 design the criteria, the finite nature of our wisdom about 24 these things, a chance to experiment, I think, will be 25 extremely useful in designing the criteria. 58 1 2 1 MR. STRAWN: I would echo the same sentiments. 2 And certainly any additional scrutiny in this area just 3 helps the overall concern about the market. So I'm pleased 4 to have any independent review. But, at the same time, 5 again, I have to say it over and over again, caution, 6 caution, caution as we approach the heating season and the 7 overall markets. So, yes, I echo the same comments. 8 MR. MARTINEZ: One question I have is, I heard a 9 lot from you about the cost of implementing -- you know, 10 keeping track, if these criteria apply or not, of the 11 uncertainty it could bring, whether a particular point 12 satisfies it or not, but one thing I wanted to ask is if you 13 see at all the public benefit of it. The Commission 14 considers this not on a whimsical basis but because they -- 15 you know, we think that there's a public benefit of it. In 16 this case it was the notion that if more information needs 17 to be made available so that contracting could be more 18 informed and reduce the costs of litigation, and things like 19 that, that one way that the Commission could nudge the

20 system towards having more information and by putting some 21 expressed requirements somewhere in its rules. And if you 22 think that there's -- and so I want to ask, do you think 23 that this is something worth pursuing? And if it is, how 24 could the Commission other than this, through processes like 25 this, how can the Commission put more expressly in its rules 59 1 2 1 the importance of having more information? 2 And the second comment I want to make is that 3 we've gone through some crisis of liquidity of market 4 activity, it might have been caused, you know, lack of 5 confidence also credit problems and all of that. What have 6 we learned for the next time around? How can we set some 7 standards that are clear and spelled out perhaps to reduce 8 uncertainty of what we consider could be some thresholds? 9 And the criteria that we laid out, we really tried to make 10 them not very constraining. We tried to make them actually 11 a minimum, a minimum level. How can we set out some trip 12 wires for the next time around? Well, let's hope it doesn't 13 happen, but the next time around they do have problems with 14 low market activity, you know, what have we learned now to 15 set those alarm bells? And would this be a proper -- if 16 that is a proper public benefit, would this be a good place 17 to set those standards, minimum standards that would set out 18 alarm bells the next time around the market activity 19 decreases?

20 And the last comment I had is that Jim Allison 21 makes a very good point that we should never lose sight of 22 that. If the concern is liquidity, we don't have a good way 23 of measuring it. And it's difficult to define it so that we 24 approximate it with market activities so that there will 25 always be false positives, false negatives, and things like 60 1 2 1 that, where you're trying to measure liquidity market 2 activity. I always think of it as measuring somebody's 3 maturing by their age. It's not that there's really there a 4 connection, a correlation, but there will always be false 5 measurements. But it's just something that can be measured 6 quite easily, readily. 7 But comments about the public good and would 8 these be a good measure to achieve those public benefits? 9 MR. SANTA: I would suggest that that, by virtue 10 of the way you have posed the question in saying, well, we 11 want to be ready for the next time and what happens when 12 this happens, it kind of reinforces the point that I made 13 earlier which is that really this is driven by a reaction to 14 events in the marketplace that really have little to do with 15 pipeline cash out mechanisms and the use of indices in the 16 tariffs. And we concede that the pipeline tariffs are the 17 most readily available jurisdictional hook for the 18 Commission to get at this. There are others that I think 19 would get the Commission further out on the limb legally,

20 but that could be explored. But nonetheless, that's it. 21 In view of that, I think, you know, the message 22 that has come from the panel has been, be very careful that 23 in trying to fix what is another problem you don't upset the 24 workability of the cash out mechanisms which I think across 25 the board there is quite a bit of satisfaction with how 61 1 2 1 those mechanisms are working currently. 2 I think that, you know, as Bruce Henning said, 3 the fact that there will be more information out there as a 4 result of these criteria I think will, in and of itself, 5 will have a benefit. Even if it is not mandated that it be 6 applied in the context of some jurisdictional instrument, or 7 to the extent that you're going to apply it to some 8 jurisdictional instrument like the cash out mechanisms, that 9 it be done prudently and applied where there is a problem 10 but not in an area where quite frankly there may be no 11 problem and there may be one created with some unintended 12 consequences. 13 MR. HENNING: At the risk of jumping ahead and 14 stepping on the toes of Mike Novak who is going to speak for 15 AGA on the next panel, I'll go ahead and take the 16 opportunity because I think the questions that you're 17 talking about really refer to that. It's very clear to the 18 AGA member companies and to an analyst such as myself, that 19 the actions that the Commission has taken and the focus that

20 you put on the issues of liquidity and sufficient data 21 reporting and accurate data reporting are bearing fruit. 22 That the information that we have available today is of much 23 better quality and is really moving to reassure the 24 marketplace. 25 And, in fact, we believe you should continue to 62 1 2 1 do that. We think that you have accurately identified three 2 important metrics and you're going to have that information 3 going. Do those generate public goods? Absolutely. Do 4 they wind up improving the market transparency? Absolutely. 5 Will that in and of itself take -- solve a potential problem 6 that might exist in the future in terms of activity? 7 Unfortunately, no. Because the reality and it was mentioned 8 earlier, for business decisions, you're going to look at 9 different kinds of transactions differently and in, frankly, 10 during periods of high volatility you are more likely to 11 enter into index transactions rather than fixed price 12 transactions. And so you will have ebbs and flows of fixed 13 price transactions. I would note that that would happen 14 whether you had mandatory reporting or whether you had 15 voluntary reporting, that is still going to go up and down. 16 So have we generated improvements? Yes, we have. 17 Are things better than they were? Yes. But in trying to 18 deal with the jurisdictional tariff issues that are facing 19 the Commission here, keep pushing forward. Keep being the

20 bully pulpit for exchange transactions. Don't interfere 21 with the decisions of others, that might determine in some 22 instances you would want to enter into bilateral 23 transactions, but continue to do the work that you're doing. 24 MR. STRAWN: You stole my thunder just a little 25 bit. I had just written down "bully pulpit". I mean, if 63 1 2 1 nothing else, just the threat of some things that could 2 happen alone is encouraging people to have more reporting 3 and just the overall scrutiny of the Commission in general 4 and the recommendations that have been made is moving us in 5 the right direction in our opinion and in the opinion of my 6 member companies. So, just the scrutiny and the 7 encouragement of people to continue to report in the way 8 that they are is really milestone. And that's why we can 9 speak with such confidence about what the Commission has 10 done so far. But, again, if you start introducing things -- 11 if it ain't broke, don't fix it, is what you keep hearing 12 over and over. And we keep saying that for a reason. And 13 it's rare that we have such universal agreement on these 14 types of things. It's not that we all love each other up 15 here -- 16 (Laughter.) 17 MR. STRAWN: -- that's certainly not the case. 18 But it's rare that we have some type of consensus in an 19 area. So we keep pointing back saying, if there is some

20 consensus we are all concerned about what would happen if 21 you started to mitigate that in some way that we don't 22 necessarily agree on at that point. So, again, the bully 23 pulpit that you have has been doing a wonderful job of 24 moving us in the right direction. And we are herded. We 25 are at least moving in the right direction. 64 1 2 1 MR. HARVEY: Before we run out of time with this 2 panel, I would like to switch direction just a little bit. 3 Because one of the issues we would like to talk about, more 4 than half of the physical document that we produced was 5 actually in the form of tables of lots of numbers and that 6 was a deliberate attempt to get a fair amount of information 7 about our questionnaire out and into the hands of everyone 8 to educate. I happen to know that Mr. Allison has looked at 9 this stuff in a fair amount of detail. I don't know about 10 the remainder of you, but I certainly would invite any 11 response. But I would like to spend a few minutes getting 12 your feedback on -- we sort of expressed within our fairly 13 quick period of time, due to the hard work of Mr. Martinez 14 to my right here, among others, but we could learn from 15 that. We would really like to hear what you all have 16 learned from that information to the extent that you could 17 share some of that with us. 18 MR. ALLISON: Cut me off when I've used up too 19 much time because I could go on for a long time on this

20 topic. 21 MR. HARVEY: Well, we do only have a few minutes 22 and we may have a couple of other observations. 23 MR. ALLISON: The data to me were strongly 24 confirming of the idea that people who are using the indices 25 are overall happy with the indices. Now, we should note 65 1 2 1 that although the most common expression of confidence was 2 rating it an eight, there were a small percentage of 3 Respondents who rated it one or two. So not everybody is as 4 happy with the indices as I am. But a very large proportion 5 did express a very high level of confidence. That is backed 6 up by the fact that they use indices; 92 percent of all 7 participants said they do in fact use indices; 62 percent of 8 all the volumes are in fact priced off index. 9 And I believe the data also show that that 10 confidence is properly place in the sense that the deals 11 that are reportable have a very high probability of 12 appearing in the indices. So the indices include a very 13 large proportion of the information from the deals that got 14 done that are reportable. And I think do not include deals 15 that did not get done. 16 Once upon a time, that second point was a 17 problem. The indices had deals that in fact were not done. 18 I think we have killed that problem. It is important to 19 continue the focus on making sure that problem does not come

20 back. And my company has implemented the recommendations 21 and we have done the audit. So we have the processes in 22 place to make sure that we do not have to visit the CFTC or 23 the FERC to explain why it is that deals that never got done 24 got reported. 25 On the positive side, the data suggests that a 66 1 2 1 very large proportion of deals that did get done that are 2 reportable did in fact show up in the publisher's data which 3 means that the indices are fundamentally reliable, so the 4 reliance that people have placed on them is, I think, 5 properly placed. 6 MR. ROZGONY: I would just say that I thought the 7 report chronicled very well the process of FERC and I'll use 8 the term "shepherding" the industry, not necessarily 9 bullying, but doing a great job of leading everybody to a 10 better solution out there. I thought it really was an 11 outstanding report. 12 There was one thing in there with regard to how 13 the first survey asked a question of do you report. And I 14 don't remember the exact specifics, but I thought in the 15 first report if you contributed to -- or if your 16 transactions were executed on an electronic platform, you 17 were considered reporting. 18 I believe in the second survey that you were not 19 considered reporting unless you submitted or you transacted

20 all your transactions. So there seemed like you would -- 21 and that may not be exactly right, but that's the way we 22 kind of interpreted it at that time. But all in all, this 23 was an outstanding report and it was very good for the 24 industry. We thought you did a great job. 25 MR. STRAWN: Just one quick comment. I want to - 67 1 2 1 - now that we are in the mood of congratulating you -- 2 (Laughter.) 3 MR. HARVEY: I didn't ask for congratulations. 4 I'm more interested in what the numbers told you guys too. 5 MR. STRAWN: Unfortunately, you are going to get 6 more congratulations; I'm sorry. 7 (Laughter.) 8 MR. STRAWN: I guess just the motion that just 9 one distinct point and that is we are the ones really using 10 these indexes. And just the fact that industrial consumers 11 are rated at 7.43 level, at the highest end of the spectrum 12 just reflects, and it accurately -- we just met with our 13 membership just last week -- and we discussed this and there 14 wasn't a great deal of debate about it. People were happy 15 that the report actually reflected the view of industrial 16 consumers. The fact that we are gaining confidence, 17 continue to have confidence, and I'm on the next panel -- 18 and just the fact that -- and just the mere threat or the 19 notion of a mandatory process makes us even more comfortable

20 with what the findings are here now and the fact that we 21 will -- as much as possible, continue to contribute to this 22 overall wealth of information. 23 So, again, one more time, we applaud the depth 24 and the magnitude and just the overall investigation of the 25 report. Because, again, just the overall scrutiny to the 68 1 2 1 overall industry, I think, helps the whole process and 2 reduces volatility. The more scrutiny, less likely you have 3 some things that might be classified as nefarious happening 4 in the future. 5 MR. HENNING: I think what the report did was it 6 provided at the snapshot as to where we are now. And 7 probably the best thing in terms of reaction to it is to 8 recognize that there was a period of time when gas supply 9 people and local distribution companies would look at the 10 index values and scratch their head, we wonder how that 11 could possibly be given their knowledge in the marketplace. 12 They don't do that now. They look at it and they say, yep, 13 that's right. It's not the issue that it was and it's in 14 part because of all the actions taken by the Commission and 15 the actions taken by the industry. 16 I think that was reflected, you know, in overall 17 seven out of ten. Could it be eight? Maybe. When I'm 18 sitting and looking at my son's grades on a curve, 70th 19 percentile looks pretty darned good to me. It's seven out

20 of ten is not a C. It's up there in that B, B plus level. 21 And I think that's where we are and that's what we feel 22 about the reaction to the overall levels. 23 MR. GERARDEN: Don Santa made some comments on 24 the difference between the use and tariffs and the 25 commercial uses. And Jim Allison has pointed out that 62 69 1 2 1 percent of transactions are using indices on the commercial 2 side. In tariffs we see the index use in the tariff side. 3 We don't see what indices are being used in commercial 4 transactions. If the staff recommendation were to be acted 5 on by the Commission, the Commission were to impose some 6 minimum criteria for an index to be used in tariffs, would 7 that have an adverse effect on those index points as they're 8 used in commercial transactions? 9 MR. ALLISON: I would not expect it to. If it had 10 the effect of the index point failing the test established 11 by the criteria, that might have an adverse effect on the 12 availability of that index for other commercial purposes and 13 that's partly what I was worried about when I was talking 14 about the false negatives earlier. But I don't think other 15 than repeating that concern, I don't know that there's any 16 reason to be worried about an adverse spillover effect on 17 the commercial side from the way these might be used in the 18 cash out. 19 MR. HEDERMAN: Thank you very much. This has

20 been helpful. We plan to get going on panel two in about 21 five minutes. So, take a quick break, but don't go far. 22 (Brief recess taken at 10:35 a.m.) 23 MR. HEDERMAN: I want to a quick moment before we 24 move on to the next panel discussion. Our colleague, Mike 25 Gorham from that CFTC who has worked very nicely with us 70 1 2 1 since I joined the Commission, is leaving the CFTC to head 2 back to Chicago and head the Center for Financial Markets at 3 the Illinois Institute of Technology and wanted to present 4 him with all the powers vested in me being an honorary 5 energy market monitor. 6 (Laughter.) 7 MR. HEDERMAN: So, here you go, Mike. 8 (Applause.) 9 (Photo taking.) 10 MR. GORHAM: Bill, thank you. Actually, I had no 11 idea I was going to get a present in coming today. And 12 actually I didn't get a chance to say something in the 13 beginning, I wanted to say that one of the things I'm going 14 to miss, I'm going to actually be leaving next week. One of 15 the things I'm going to really miss is the incredible 16 public-spirited cooperation between FERC and CFTC and I've 17 loved every minute of participating in that. And I think 18 the kind of thing that you guys are doing here and I love 19 the kind of -- I can't remember when we've had feedback like

20 that where you would have a whole panel of industry experts 21 that love what you've been doing. 22 (Laughter.) 23 MR. GORHAM: And it's very nice to hear. 24 MR. HEDERMAN: I'm sure we can fix that. 25 (Laughter.) 71 1 2 1 MR. HEDERMAN: I'm glad to see Mr. Strawn back 2 for this panel. We had questions that, again, compare and 3 contrast will be useful. 4 Steve, do you want -- 5 MR. HARVEY: We like to keep things moving in our 6 conferences. And so let's start with Mr. Nauman. 7 MR. NAUMAN: Thank you. My name is Scott Nauman. 8 I am the gas marketing manager for ExxonMobil covering both 9 North and South America. Today I'm here representing the 10 Natural Gas Supply Association which, as I'm sure you know, 11 represents both integrated and independent producers and 12 marketers of gas. I think that is significant from the 13 standpoint that the organization that I represent and the 14 member companies have been very active in the industry 15 development of price reporting standards. And as the Staff 16 Report shows have also been in a leadership role in terms of 17 actual reporting all of our data. 18 I will keep my comments brief in that I look 19 forward to the Q&A section of this. I think that is

20 important. 21 I would start by saying appreciate the 22 opportunity to be here. 23 A lot of the discussion on price reporting 24 circles around the term "confidence" and confidence by its 25 nature is a subjective term. As I look at the data from the 72 1 2 1 Staff Report I find a couple things that jump out. I think 2 the most compelling piece of information, it's been noted 3 before, is that given free choice over 90 percent of the 4 respondents indicated that they do in fact use indices, 5 physical indices, for their gas transactions. Certainly we 6 do, those in and membership of the NGSA do. 7 If you go down the scale and look at on the one 8 to 10 basis what do people think as noted in our comments 9 that were submitted the glass is half full. The vast 10 majority scored five or higher on their level of confidence. 11 Over two-thirds scored it seven or higher and you have heard 12 that before. 13 I can tell you from personal experience in 14 filling out the survey one of the things that I would note 15 is that question of confidence was asked of the market as a 16 whole. That includes highly liquid points, that also 17 includes some what I would call, more outlier points. I 18 suspect if you asked the same question with respect to the 19 top 10 or 20 points you get even higher scores.

20 Again it's subjective, but I view the responses 21 from the people that had input to be very positive. 22 With respect to the Staff Report, I and the 23 association that I represent concur with many of the 24 statements in there. Quality of reporting has improved. 25 Clearly the quantity of reporting has improved. The data 73 1 2 1 provided by the index publishers has improved. As I 2 mentioned, the competence level continues to increase. 3 One area, and I have submitted an addendum to our 4 comments that have a series of graphs and some analytics 5 behind this, but one of the things I noted in looking at the 6 voluminous data, and that I think should be stressed is the 7 need to look at the results on a volume-weighted basis. And 8 I will start by saying that every respondent is important. 9 The Commission threw out a very large net and that is 10 important. It is important not just to talk to the 11 ExxonMobils of the world, but it is important to talk to the 12 smallest LDC out in the heartland. But when you look at the 13 results one of the things that I think was intuitive to me 14 was that it would be likely that the smaller entities were 15 less inclined to report. 16 I will offer from anecdotal evidence in meetings 17 like the one in Kennesaw, Georgia, one of the things we 18 learned was, either because it was burdensome to the smaller 19 entities, they felt that larger entities were reporting and

20 so they were covered. So I was not surprised when in every 21 category producers, marketers, LDCs, industrials, those that 22 report, tended to be bigger than those that do not. That's 23 no surprise. 24 And so I think the data needs to be looked at 25 from that frame of reference. I'd much rather have the top 74 1 2 1 20 out of 300 reporting regularly than worrying about the 2 last 280 to 300, and we viewed the results that way. 3 I guess I would close with our view is that the 4 Commission should continue to pursue the path that it has. 5 I think the policy statement has had a significant effect. 6 As I mentioned before, quantity and quality seem to be up in 7 reporting. I think for some of us, the policy statement 8 reaffirmed what we already knew. For some it provided a 9 roadmap for where to go. But at least it puts us all on the 10 same footing. 11 I think the responses to level of confidence 12 reflect a very positive outcome from the work that's been 13 done and I would encourage that to continue. As I said, I 14 look forward to your Q&A's. 15 MR. HARVEY: Thank you very much. 16 Mr. Wilson. 17 MR. WILSON: Good morning. My name is Nathan 18 Wilson. I am with Conectiv Energy Supply Inc. I am here 19 today on behalf of the Electric Power Supply Association of

20 which Conectiv is a member. 21 EPSA's members account for nearly 40 percent of 22 the installed generating capacity in the United States. As 23 large buyers of natural gas and sellers of electricity, EPSA 24 members rely on indices for price discovery and risk 25 management and have supported the Commission's efforts to 75 1 2 1 encourage voluntary price weight. 2 It is our belief at EPSA that one, market 3 liquidity has increased over the last two years as evidenced 4 in the Staff Report. And two, the quality of indices has 5 greatly improved due to the Commission's initiatives. 6 Three, the Commission's actions and the 7 industry's responses have obviated the need for further 8 Commission action on price reporting and indices. 9 And, four, the best way for the Commission to 10 improve price transparency and promote competition in the 11 wholesale electric markets is to continue its efforts to 12 establish regional organized markets. 13 I would like to briefly iterate some facts 14 underlying these positions. First, there has been a quick 15 and substantial industry action to improve the quality of 16 published indices and market transparency. The speedy 17 formation of the Market Price Reporting Action Committee 18 which was an ad hoc industry group of more than 35 energy 19 industry organizations including energy companies,

20 exchanges, brokers, industrial end users and price index 21 publishers, that effort should be construed as an indication 22 that the energy industry takes the Commission's efforts in 23 this area very seriously. 24 The Market Price Reporting Action Committee, 25 which I'll refer to as "MPRAC" successfully met its 76 1 2 1 objectives to aid the Commission in understanding the 2 quality and depth of reporting data, and in assessing 3 barriers or weaknesses in price reporting. MPRAC's efforts 4 showed that both market liquidity and reporting had 5 increased and that the markets confidence in indices has 6 also increased. 7 The Commission's March survey validated the MPRAC 8 results, but noted the perceived absence of a majority of 9 reportable transactions. 10 MPRAC was able to shed some light on the latter 11 issue by identifying a methodology assumption and explaining 12 some of the low reporting results in the staff survey. The 13 MPRAC work concluded that approximately 75 percent of all 14 reportable day-ahead and bid-week natural gas volumes are 15 being captured in indices. 16 To make the story even better, the Commission's 17 March survey results indicated that some market participants 18 not currently reporting said that they will soon begin 19 reporting to index publishers. So to summarize the

20 reporting of price forming transactions has improved and we 21 should expect it to continue to improve. 22 EPSA supports the efforts of the Commission to 23 promote voluntary price reporting. The Commission's policy 24 statement issued last summer and the market behavior rules 25 provide sufficient structural and behavioral safeguards 77 1 2 1 against behavioral irregularities. These rules are adequate 2 to deter future behavior that may undermine confidence in 3 the natural gas and electric markets. The market behavior 4 rules have provided clear guidance to the industry and help 5 to establish best practices for internal company controls. 6 Certainly with the issuance of the policy 7 statement, the behavior rules and the surveys to the market 8 participants the Commission has not been idly standing by. 9 The activity of the Commission to date has been commendable. 10 Further specific and overly prescriptive actions such as 11 mandated reporting are not necessary. 12 The natural gas industry especially is 13 inefficient and in a competitive market certainly not in 14 need of structural changes that require Commission action. 15 Rather than focusing on price reporting and indices as a 16 means of improving the electricity market, EPSA would 17 encourage the Commission to improve the transparency and 18 liquidity of this market by continuing its efforts to 19 further develop regional transmission organizations

20 nationwide. 21 RTOs inherently produce the transparent 22 information that market participants need to make reliable 23 choices. EPSA supports the Commission's actions taken to 24 correct market irregularities associated with price 25 reporting and indices. The Commission has taken sufficient 78 1 2 1 action on these issues. The Commission should accept the 2 progress reported to date on price reporting and should 3 focus on promoting voluntary price reporting and organized 4 markets. 5 Thank you. 6 MR. HARVEY: Thank you very much, Mr. Wilson. 7 I will go to Mr. Novak. 8 MR. NOVAK: Good morning. My name is Michael 9 Novak. I'm assistant general manager of Federal Regulatory 10 Affairs with National Fuel Gs Distribution Corporation. 11 On behalf of AGA, we would like to say that we 12 think the industry has made very good progress under the 13 policy statement. The industry report confidence levels, 14 seven out of ten is an acknowledgement of increased 15 satisfaction or progress. There is no general outcry in the 16 industry that published indices are inaccurate today. That 17 is not reflective of the market value of gas. Rather the 18 general consensus is that we turn the corner. 19 This doesn't mean that we're done, however. But

20 on the other hand we shouldn't consider changing course. We 21 highly are in support of continuing the voluntary efforts 22 for reporting. We don't see the need to move to a mandated 23 option at this point. 24 For these reasons we feel that FERC should 25 continue to focus attention on the issue. Essentially the 79 1 2 1 Commission should continue its monitoring role. And look 2 forward to the questions and answers and providing more 3 detail. 4 Thank you very much. 5 MR. HARVEY: Thank you, Mr. Novak. 6 Mr. Weaver. 7 MR. WEAVER: Good morning. I am Alonzo Weaver. 8 I am the vice president of Operation for Memphis Light Gas 9 and Water. I am here on behalf of the American Public Gas 10 Association. 11 APGA is a national nonprofit association of 12 publicly owned natural gas distribution systems with over 13 600 members in 36 states. We are publicly owned gas systems 14 that are not for profit. We are retail distribution 15 entities that are owned by and accountable to the citizens 16 that we serve. 17 MLGW is a large company that is a member of APGA. 18 We have about 45 BCF that we flow through our system 19 annually. We have a peak day of around 650,000 MMBtus. I

20 have a staff that does a lot of the gas purchasing for MLGW. 21 It's a staff of about three people that actually do the 22 purchasing itself. We use the indexes quite a bit in 23 purchasing our natural gas. We buy mostly index gas. In 24 fact, we buy all index gas when they post. When it doesn't 25 post, then we lock in our bases using the NYMEX futures 80 1 2 1 close. So the indexes are important to us. They are very 2 important to us even though we are a large company. 3 Now, we have a lot of resources. Most of the 4 APGA companies do not have those sort of resources. And 5 about 500 of our systems are smaller systems with very few 6 customers and they don't have a larger staff like ours to do 7 their purchasing. So indexes are very important to them as 8 well. 9 So, therefore, APGA has taken a position and we 10 still maintain our position that mandatory reporting is 11 necessary. 12 We see the price reporting system as being one 13 that is broken. It has improved through the past two years, 14 but it is still not fixed. It's a broken system that's not 15 fixed yet. 16 We like to see all market participants to 17 participate in this report, that counterparty information be 18 included, that it should report to an independent hub and 19 the hub doesn't have a commercial venture. FERC should have

20 oversight over the hub, but shouldn't run its day-to-day 21 operations. The public and the publisher should be able to 22 access the data when they need to. 23 We will support this position because we want 24 what a lot of others have stated that they want, a market of 25 integrity and liquidity, and we believe that this is the way 81 1 2 1 to get to it. 2 APGA members rely on price indices for the vast 3 majority of their gas purchases, as I stated before. 4 Unfortunately, the voluntary system has failed in getting 5 all the market participants to report. It is a selective 6 process. Some report, some do not. 7 So it still leaves the question of whether or not 8 there is manipulation. So in order for us to have 9 integrity, we like to see mandatory reporting. 10 Thank you very much. 11 MR. HARVEY: Thank you, Mr. Weaver. 12 Mr. Walker. 13 MR. WALKER: Yes. I am Jeff Walker and I am the 14 chief risk officer for ACES Power Marketing who acts as a 15 transaction agent for its 14 member owners who are 16 cooperative, load-serving power supply entities. And these 17 entities consume a lot of gas for their generation and are 18 primarily in the wholesale power market. 19 ACES Power Marketing rarely execute power

20 transactions at an index price. However, about three- 21 quarters of our gas transactions settle at an index at 22 various locations. And I'd like to qualify my comments 23 today that my views expressed today represent the views of 24 ACES Power Marketing, not necessarily under ECA with its 25 large and diverse membership of distribution coops and 82 1 2 1 electric consumers. So my views are those of a practitioner 2 for a subset of NRECA's members. 3 We believe that the keys to industry confidence 4 and market transparency are liquidity, good process, and 5 adequate disclosures with published indices. Have we turned 6 the corner on improvement? Yes, we believe we have. 7 The first two keys that I mentioned which were 8 liquidity and good process, take time. First it takes time 9 to recover market participation by those who transact. And 10 it takes time to implement good process and to participate 11 voluntarily. For example, the 14th member that permitted us 12 to do price reporting allowed us to start doing that in late 13 May. The other ones already had been doing it for some 14 time. 15 So it took them a while to get comfortable with 16 the confidentiality process, the internal control process, 17 and the idea that they were going to be disclosing sensitive 18 information to index developers. 19 From the standpoint of index developers, we

20 believe that they need to adequately disclose information to 21 further restore confidence. We believe that there need to 22 be well-defined locations. 23 In other words, what physical control area 24 delivery locations are rolled up together in each index 25 location. They need to report volumes by location. They 83 1 2 1 need to report the quantity of transactions making up that 2 volume, and the number of transacting entities. There needs 3 to be a clear indication if they provide subjective price 4 views as opposed to data that comes from transactions, and 5 obviously they need to disclose what their methodology is 6 for deriving price indices. 7 Obviously it would be nice if they would all have 8 a common methodology, but I'm not going to hold my breath on 9 that one. 10 In the meantime, ACES Power Marketing avoids 11 executing index price transactions at low volume locations. 12 Instead what we do is use highly correlated locations that 13 have higher volume that we can rely upon more. Overall we 14 believe that the Commission should continue to encourage 15 voluntary participation of price reporting. We believe that 16 the Commission should continue to encourage compliance with 17 the policy statement and the requirements and guidelines of 18 that statement. We believe that these requirements and 19 guidelines are adequate for good process, both for price

20 reporters and index developers. 21 Mandatory reporting in our view does not capture 22 for sales of gas in other nonjurisdictional activities. 23 It's more important to get reporting by substantial 24 participants with significant volumes. We believe that 25 mandatory reporting would increase quantity, but not 84 1 2 1 necessarily quality. Those who choose to participate 2 voluntarily now will probably only do so if they have good 3 process in place and are complying with the policy 4 statement. If you impose mandatory reporting, everybody 5 will participate, but that does not mean that they will have 6 good controls or good process. So while it may improve 7 quantity, I don't believe it will necessarily improve 8 quality. 9 Unlike endorsing an electronic platform as the 10 end-all, be-all kind of reporting solution that was 11 suggested at least by one individual on the prior panel, we 12 believe that a robust, competitive market environment is our 13 traders talking to bilateral counterparties. Our traders 14 also listening to broker squawk boxes, and our traders 15 watching the ICE screen and any other electronic trading 16 platform that is available all at the same time and 17 transacting to the economic benefit of our member owners 18 wherever the best mechanism for that is. 19 Our confidence comes -- improved confidence comes

20 from the fact that when we see price indices it does reflect 21 the transaction prices we are seeing in the market when we 22 transact to fixed prices. 23 Thank you. 24 MR. HARVEY: Thank you, Mr. Walker. 25 MR. Musur. 85 1 2 1 MR. MUSUR: Good morning. My name is Al Musur. 2 I am the director of energy and utility programs for Abbott 3 Laboratories, but I am here today representing the 4 Industrial Energy Consumers of America as the chairman of 5 the group. 6 The IECA is a group of manufacturing companies. 7 Our members purchase in excess of $10 billion in energy 8 annually and have sales approaching $400 billion. More 9 importantly, we tend to be energy intensive industries and 10 where energy and its costs can have a huge impact on our 11 competitiveness. 12 Our members represent plastic, cement, food, 13 paper, food processing, chemicals, fertilizer, insulation, 14 steel, glass, industrial gases, pharmaceutical and brewing. 15 So we cover a very broad range of industrials in the United 16 States. 17 It has been our position and still is our 18 position that we favor mandatory reporting of all natural 19 gas transactions to a single third party that can make the

20 raw data available to all. We would suggest that the FERC 21 provide oversight of the process. The counterparty 22 transaction data must be provided for that oversight 23 function to work properly. And that all counterparty data 24 must be and remain confidential to make the system work at 25 all. 86 1 2 1 In your survey our members are the ones and twos. 2 You know, we have low confidence in those institutions. I 3 think it's a fallacy to believe that because people use 4 indices they have confidence in them. People use indices 5 because that's all there is to use in some cases. You know, 6 we wind up with a problem that we the consumer who don't 7 live in the market as the rest of these people do every day, 8 every minute, you know, if we need to know a price, we have 9 a choice, pick up a phone and call a marketer and say, 10 what's the price? And he says, "it's $6, trust me" or you 11 go to an index and it says it's $6, trust me. Right now 12 we're not sure we can trust either. 13 We have been asked as an organization why we 14 believe that natural gas is so special a commodity. And it 15 should require some kind of special handling like a 16 mandatory reporting system. We think there are already four 17 things that kind of distinguish natural gas. One of them is 18 for the consumer natural gas has no substitute. Natural gas 19 is used as both a feed stock and as a fuel. And as a feed

20 stock, the chemistry doesn't allow anything else. 21 That will make it a particular product, there are 22 probably more chemical pathways than one to get there. But 23 if yours is natural gas and it becomes unavailable without 24 rebuilding entirely, you're out of the business. 25 As a fuel, all of us under the Clean Air Act are 87 1 2 1 pretty much limited as to what we can burn. Most of us have 2 got other fuels as back up for natural gas. But our permits 3 are restricted. We can't burn them all year long. We'll 4 get a couple hundred hours of operation with a secondary 5 fuel, but if we don't have natural gas, we're not in 6 business. 7 The second thing is, the only delivery mechanism 8 available to us to get the natural gas so we can burn it is 9 through monopoly transmission and distribution systems. You 10 know, if I were buying anything else, I could get a barge 11 loader, a truck loader, or a boat load and I have some 12 choices as how I want to get it and when I want to get it 13 and how it's going to be handled. In this business, it 14 comes the way it always comes, it gets pushed into a pipe 15 and then through an LDC and then to me and there are no 16 choices in that. 17 My business is just outside of Chicago. Chicago 18 has probably every major gas transmission pipeline coming 19 into a hub in Joliet. Unfortunately, I'm north of Chicago

20 and there's one pipeline that serves us. It's already 21 constrained and because of other reasons it will never be 22 relieved. And so it's a problem for me. Because the fact 23 that I have no choice even among pipelines becomes 24 constraining. The system is different. Natural gas is a 25 flow-based system. You know, whether I arrange for the 88 1 2 1 transmission and delivery of gas or not, I can still suck 2 gas out of the pipe and I'll still get a bill from somebody. 3 So I can go into the market and I can buy futures 4 on the NYMEX and I can have gas delivered to the Henry hub, 5 and I can make arrangements with a gas pipeline and deliver 6 it to my LDC. I can go to a marketer and ask them basically 7 to do the same thing and price the gas off an index. 8 I can go to my LDC and say I want to buy tariff 9 gas, you do all that work for me. Or I can lean on the 10 system and just take gas, and as long as there's a meter 11 there somebody will send me a bill because there's a tariff 12 someplace that tells them how much. It's sort of an after- 13 the-fact kind of a business. We are going to consume the 14 gas and everybody knows we're going to consume the gas and 15 unless somebody comes out and shuts off a valve, that gas 16 will be consumed. The only question we have to answer is, 17 at what price was it consumed? 18 And so what we have to do is make sure the 19 pricing mechanisms that we're using for that are as accurate

20 and transparent an liquid as we can get. 21 The reason that we're using indices is because 22 historically that's the way that the system developed. You 23 know, I can go out and buy 90 percent of my gas to hedge the 24 price, but day to day, I don't know how much gas we're going 25 to consume until that day occurs. Now, if I have to go into 89 1 2 1 the market to get some, the most convenient way to do it is 2 by an index. I can call up my broker and say, this much gas 3 today, tomorrow, the end of the week, and we're going to 4 pay, you know, whatever the Houston ship channel is plus or 5 minus something. And we have something that we had 6 confidence in was an average price. I'm not looking for the 7 most, I'm looking -- or the least, I'm looking for what the 8 market price was. 9 I don't understand why a consumer would want 10 everybody who is in the gas business to be reporting prices. 11 I don't know why we would want an index that represents less 12 than the whole. Because we don't know if that's the high 13 end of the bell curve, or the low end of the bell curve, it 14 would be much better for all of us if we had all of the data 15 and it was available to everybody. And then from there we 16 could make some reasonable decisions. 17 I appreciate all the work that the Commission is 18 doing, the Commission staff. I think this is a tremendous 19 undertaking. I'm glad that all of the people in the

20 industries, the marketers and the pipelines and that are 21 happy with the system the way it is. But as a customer, I 22 don't think it works very well. 23 MR. HARVEY: Thank you, Mr. Musur. 24 Mr. Strawn. 25 MR. STRAWN: I'm Alex Strawn. Employee of 90 1 2 1 Proctor & Gamble, and I oversee the physical contracting of 2 gas for all of Proctor & Gamble's facilities and sites in 3 North America. Today I am representing the Process Gas 4 Consumers Group as chairman and my remarks should be taken 5 from that context. 6 Again, Process Gas Consumers are a trade 7 association of industrial gas companies who require natural 8 gas, also as a feedstock and in use in their key operations. 9 We also represent a broad cross-section of American 10 industry, both geographically and in terms of the products 11 produced. We employ more than a million and a half people 12 nationwide and affect the lives of many consumers as a 13 result of that direct employment. We also use more than 14 half a TCF of gas annually. In general Process Gas 15 Consumers try to promote a coordinated, rational, and 16 consistent federal and state policy movement in relation to 17 natural gas supply and transportation. 18 I really appreciate the opportunity to speak on 19 this panel in regard to this issue for which we have a

20 substantial stake. Although I will say for the benefit of 21 this panel that our position remains unchanged. We 22 vehemently oppose mandatory price reporting. We have a 23 current confidence in the data integrity of the current 24 price indices and we believe that previously they may have 25 been undermined by the inappropriate action of a few gas 91 1 2 1 traders. We violently oppose any attempt at market 2 manipulation by these parties or any other parties. We 3 believe that the government should penalize these types of 4 abuses and the abusers. 5 However, we support the use of free market price 6 reporting systems, plural, as the most effective way of 7 providing industry with price transparency at the supply and 8 market area hubs. 9 We believe the Commission should focus on how to 10 improve the credibility of existing price reporting systems 11 rather than how to design an entirely new system which I've 12 said previously would possibly add to the uncertainty of the 13 overall markets, particularly in gas. 14 We have so many concerns in the supply/demand 15 equation from an industrial point of view, adding this level 16 of uncertainty just heightens our concern about the overall 17 market. 18 We believe mandatory reporting is an unnecessary 19 step that would add additional costs to my member companies

20 both large and small. In fact, we believe you might have 21 the reverse effect of actually having less reporting by the 22 companies that are involved and more reliance on the index 23 itself. Fewer fixed-price deals. 24 The case really has not been made to require 25 nonjursidictional parties to be required to divulge the 92 1 2 1 tales of private contracts. And from an industrial point of 2 view, we have enormous competitive concerns on how that 3 information might be divulged, even with confidentiality 4 agreements in place with the reporting agencies. 5 At a minimum FERC should continue to play an 6 active surveillance role and use a bully pulpit to move 7 people to more active reporting at all times. 8 There is no need for a single data collector, or 9 an index provider. FERC does not need to pick a winner in 10 this contest. Competition is vital and must be allowed to 11 flourish through multiple data collection agencies and index 12 providers. 13 Again, adding a new system, creating a new 14 system, adds uncertainty to an already, sometimes uncertain 15 market. 16 A few interesting points from the May 5th Staff 17 Report in our opinion. Industrial -- industrial consumers, 18 people that I represent are the greatest users of these 19 indices. We also have the highest level of confidence in

20 these indices. And we also represent one of the largest 21 reporting segments of these indices, second only to 22 producers. 23 And the steps that FERC has taken to date are 24 more than sufficient in our opinion to restore confidence in 25 the indices. The policy statement, great job, the safe 93 1 2 1 harbor, and the periodic surveys as well. 2 Options for future Commission actions should 3 include continued monitoring and vigorous monitoring of the 4 current situation. And although significant progress has 5 been made, PGC is confident in the indices and continued 6 monitoring by FERC would help even more. 7 And lastly, and most vehemently, mandatory 8 reporting is completely unnecessary and PGC does not believe 9 that it would substantively improve the indices. In fact, 10 more than likely you would have the opposite effect, less 11 reporting overall by our member companies. 12 Thank you. I look forward to your questions. 13 MR. HEDERMAN: Thank you. We expected that this 14 panel would be one where we could get more contrast and 15 opinions and you have not disappointed. I think we'll work 16 through the list of points because I think it's real 17 important to understand the basis for the different 18 positions. And I would like to start with the point about 19 one data hub chosen by, I presume, the Commission, would be

20 your idea, Mr. Musur? Or do you have the industry coming to 21 consensus to develop that monopoly data hub system? 22 MR. MUSUR: The first time we had proposed this 23 we had suggested that somebody like the EIA who is already 24 doing data collection just collect all the data. You know, 25 the University of Houston with their hub concept, I don't 94 1 2 1 think we have a position on that other than the fact, you 2 know, everybody does so much reporting with the government 3 now. There are mechanisms within the federal government of 4 keeping things confidential. 5 Every year all of us are filling out reports for 6 the Census Bureau on Energy that we consume and how much 7 coal and how much this and that. And they tell you, you 8 know, we can't guarantee that this is going to be 9 confidential, but it hasn't been a problem. So people 10 continue to do it and don't complain about it. 11 This is not the first commodity to see this. The 12 U.S. Department of Agriculture proposed rules for mandatory 13 reporting for livestock prices and it just went into effect 14 in 2001. And their reason for doing that was to make 15 markets more transparent and to offer new market information 16 with respect to pricing, contracting for purchase and supply 17 and demand conditions. 18 I mean, it's the same thing there as it is here 19 and it worked fine. That's also an industry where people

20 are using the indices to determine price for the commodity. 21 And it's worked great. You know, nothing changes if nothing 22 changes. And if we're going to sit around here and say 23 everything is fine, just because today we don't have a 24 problem, I'm not sure that that's a solution. 25 There's constraints on natural gas today that we 95 1 2 1 had never had in the past. You know, we've got the mercury 2 mat coming down like that, the Interstate Air Quality Rule 3 that's going to push more utilities from coal to gas. 4 There's going to be more competition in the marketplace for 5 that. There will be more volatility unless we have 6 transparent and liquid pricing points because they tend to 7 mitigate the volatility of those markets. 8 You know, in the last ten years, from 1992 to 9 2002, the natural gas demand for the electric power industry 10 went up 60.5 percent, accounting for 63.6 percent of total 11 increase in U.S. demand over that period of time. That's 12 not going to change. There's going to be more pressure, not 13 less. And we really believe that if we are going to do this 14 right, let's get the pricing right, that's going to require 15 some mandatory reporting to do that. 16 MR. HEDERMAN: I'm sure you're familiar with the 17 EIA's experience with storage data reporting. Do you have 18 any concerns about timeliness and so forth if EIA were to 19 pick up?

20 MR. MUSUR: We have problems with the voluntary 21 nature of the reporting. You know, if the report is 22 mandatory and there are rules for when people report and 23 they understand there are consequences for not reporting, 24 they will report. 25 You take a look at this, you know we had a little 96 1 2 1 rock thrown into a puddle, you know, a couple of traders who 2 did something. In an industry suddenly the heavy hand of 3 government is going to come down and boy it snaps to and it 4 starts cleaning up it's house and says, "you can trust us 5 now". I'm not sure consumers are ready to make that leap of 6 faith yet. 7 MR. HEDERMAN: No, there's nothing like the 8 threat of help from Washington to get the fear of God. 9 (Laughter.) 10 MR. STRAWN: May I make a comment? 11 MR. HEDERMAN: Mr. Strawn. 12 MR. STRAWN: I guess let me address a couple of 13 points that you have raised. The EIA, yes, we've switched 14 some reporting on storage numbers to EIA and I would be one 15 of the first people to say that there were a few bumps in 16 that process. In fact, there might still be a few bumps. 17 And those bumps, in some cases, have contributed to a little 18 bit of volatility. But that doesn't mean that it's an 19 imperfect system. It's getting better each week, but it's

20 taking time to get there. Since that time, there's a lot 21 more volatility in the overall market. 22 And, again, when we start talking about new 23 systems of single approach to reporting data, you're going 24 to heighten that volatility on top of an already, in some 25 cases, still evolving system of EIA reporters. So I really 97 1 2 1 challenge the notion that mandatory report is going to add 2 to the quality of the data. Because if nothing else, more 3 industrial consumers would simply go to the index. There 4 will not be more fixed reporting, fixed price reporting. 5 In addition to that, I guess in terms of the 6 confidentiality issue, yes, a large number of our members 7 already report in a variety of ways to other government 8 agencies. Many of us have cogent operations, and adding 9 that additional burden of mandatory reporting is on 10 companies that are already stretched at the edge of 11 competitiveness is something we would not welcome. It's not 12 in any way that we want to shield or avoid the aspect of 13 more fertile reporting. It's just that we're already 14 burdened across the board. 15 And just the notion that you have more broad 16 reporting and the possibility of leaks of information even 17 with confidentiality, scares a lot of the industrial 18 consumers. And it scares them because every day we're out 19 in a very competitive marketplace. And just the hint of

20 data -- just the hint of data about one counterparty or what 21 deal we may be doing, the market -- and I mean, the stock 22 market and the market at large can infer certain nuances 23 about the way we are doing business. And believe it or not, 24 I do care about saying for Proctor and Gamble what Kimberly 25 Clarke does and for other companies. We are very concerned 98 1 2 1 about what happens. And in no way am I trying to say that 2 confidentiality wouldn't be respected. But things happen. 3 Small things happen, nuances happen. Mandatory reporting to 4 a single entity for which we may or may not have input in 5 its design would frighten us in terms of how this reporting 6 would be maintained and the overall integrity. We like the 7 system of competitive reporting because, if nothing else, we 8 always have a to and fro between the parties that are 9 involved. And there's a possibility of evolution of those 10 parties. Thank you. 11 MR. MUSUR: We are not suggesting that the EIA 12 take on the responsibility of doing all of the index 13 reporting. We are talking about them doing is collecting 14 the data with counterparty data so that it can be at least 15 challenged to make sure that it's good data. And let those 16 who report, report. Who knows, we may wind up with a whole 17 new system of even more useful indices that flow from this 18 when everybody gets to see all of the numbers. 19 MR. HEDERMAN: Thank you.

20 MR. NAUMAN: If I could. It's interesting Mr. 21 Strawn and I today are sitting at opposite ends of this 22 table. We represent opposite ends of the spectrum. I'm a 23 supplier, he's a consumer. We have a few things in common. 24 One of the things we have in common is all of the responding 25 producers use indices. All the responding industrials use 99 1 2 1 indices. I concur with everything Mr. Strawn just said 2 about the down side to mandatory reporting. Some things are 3 clear that it will and won't do. It will not improve the 4 integrity of the indices. That's a fallacy. It will not 5 improve transparency. 6 I agree with Mr. Strawn, it will decrease the 7 amount of reporting. When we have industry meetings whether 8 they're suppliers or consumers, there are people out there 9 that say, if you try to force me, I just want to do fixed- 10 price deals. I'll be what we call a "free rider." And what 11 I find is oftentimes those that call for mandatory reporting 12 are free riders. There are those that use the indices, 13 don't contribute to the system. A couple of things are for 14 sure. It's going to cost more. 15 And one thing that's for sure is it goes against 16 free-market principal. I'm a firm believer, my company is a 17 firm believer, the association I represent is a firm 18 believer in letting the market decide what it wants, letting 19 the market decide what it needs. We've all got choices.

20 I'll represent my own company. Essentially all of the gas 21 that we sell we have the option of selling at a fixed price, 22 we have the option of selling it against the NYMEX futures 23 contract, we have the option of using any of a number of 24 indices. And if they are not liquid enough for us, we can 25 move to the next one. And what determines which one we use 100 1 2 1 is typically the bilateral discussion we have with the 2 customer and coming to common ground and what we want to 3 use. 4 The last thing that I hear from both my side of 5 the chain and from the people that we deal with in the 6 consuming side is that they want to be compelled to do 7 something in a certain way without letting the market decide 8 what is really needed. 9 So I will echo Mr. Strawn's comments, but echo it 10 from the supply side of this, that mandatory reporting 11 strikes me as just wrong-headed in this instance. 12 MR. HARVEY: I would like to ask a sort of 13 different question of everyone here really. The last two 14 years or so have seen a lot of changes in the approaches to 15 reporting, kind of talked about a lot of that. It's also 16 overall, I think, seen a fairly dramatic change in price 17 levels for natural gas and expectations around those price 18 levels for natural gas. It's an issue that plays here, I 19 think, to a certain degree in terms of the importance of

20 confidence. 21 Each of you in a way, we know from the 22 questionnaire, represents a piece of the industry that makes 23 a lot of use of index pricing and has for a while, in many 24 cases in your individual statements here individual 25 companies make a great deal of use of indices. 101 1 2 1 Have you done anything in your experience over 2 the last two years differently in terms of the way you 3 approach the market as buyers or sellers, in effect 4 consumers of price information based on those two different 5 things, a sort of change in level, a sort of ratcheting up 6 maybe of the seriousness of what a price actually means 7 here, and the struggle of working through confidence and 8 coming out at different levels. Do you contract 9 differently? Do you enter the market differently? Do you 10 think about these issues differently than you might have in 11 late 2000 before when the ripples just started from the 12 recognition of issues. Or, are things pretty much the same 13 ad we're just -- you know, we're working through this on the 14 side? 15 MR. NOVAK: Speaking on behalf of National Fuel 16 and not the American Gas Association, we recognize that it's 17 important to do fixed price deals in order to make the 18 system work. So that any tendency that there might be over 19 time in response to pricing signals to do more index work,

20 we have to take some pause and reconsider, you know, whether 21 that's good for reporting prices, whether that's good for 22 the overall objective and we need to communicate this to our 23 state regulators. It's a big system, it's much simpler than 24 just -- I mean, it's much more complex than just saying, you 25 know, what's the best price. 102 1 2 1 MR. HARVEY: But for example to follow-up because 2 I think the state regulatory issues are interesting ones 3 here in the overall price dynamic. You know, there's a 4 certain amount of effort in terms of justifying and 5 explaining any pricing. Certainly index pricing, the use of 6 indices basically is a strategy for basically a set of 7 benchmarks, I guess, for arguing for very short-term kind of 8 pricing. Have you seen interest in -- you know, where as 9 going into a longer-term market has other sort of 10 justifications around it that take a different approach and 11 can take a little bit of work to the extent that regulators 12 are or aren't comfortable with that. Have you seen this 13 pattern shifting at all? Are they pretty much the same as 14 what they were two years ago? And do these issues of 15 changing price level and of sort of changing levels of 16 confidence in the prices themselves, have they played in 17 those kind of decisions? 18 You guys have a great deal, in effect, my sense 19 is you all have a great deal at stake in the confidences of

20 these price indices. 21 MR. NOVAK: The indices have this appearance of 22 being safe because you -- if you believe that they are the 23 market then you're at market and you're not taking a risk of 24 being above market. 25 But, it probably varies from company to company. 103 1 2 1 We hold a significant amount of storage. We can look at 2 longer terms, we can look at fixed price margins, look at 3 the strip and take risks, maybe in determining the strategy 4 that other companies who don't have some more assets can't, 5 so it's difficult to come up with one answer. 6 MR. WEAVER: Speaking on behalf of my company, 7 and experience that we've had, we did change our buying 8 strategy to some extent. We started using more financial 9 instruments to lock in our prices. But still going with the 10 index pricing in order to make sure that we got delivered 11 gas, the deliverability issue of gas. We didn't want a 12 situation where the marketer will say, well, your cheap gas 13 didn't show up that day. So we want to make sure we had 14 that guarantee and then went into fixing the prices using 15 hedging activities. 16 MR. HARVEY: Now, you also, I believe, mentioned 17 you use some basis swaps to lock in some of those 18 relationships? 19 MR. WEAVER: Yes, we do.

20 MR. HARVEY: Now, those it would seem to me are 21 explicitly based on differences between indices. I mean, 22 ultimately the swaps themselves wouldn't necessarily equal 23 that, but they would be based on experience of differences 24 between indices? 25 MR. WEAVER: Right. 104 1 2 1 MR. HARVEY: But your analysis has gotten you 2 more comfortable with that as an approach, so presumably 3 you're move to a more liquid market in order to buy on an 4 index basis and using that basis to get to your location? 5 MR. WEAVER: We use that when we -- when our 6 location does not post. When there is not enough liquidity 7 at that particular location, so then we move to the basis. 8 MR. HARVEY: So let me see if this is the right 9 interpretation. So in effect, the concerns you might have 10 had about liquidity at your location you resolved by locking 11 at a different still location that you've got more 12 confidence in? And that would be different probably than 13 you were doing two years ago? 14 MR. WEAVER: But overall it's still not a good 15 situation for us. 16 MR. HARVEY: Right. You're still depending on 17 that difference; exactly. 18 MR. NAUMAN: A couple of observations. And I 19 guess the first one I would make, I see more than just the

20 U.S. market in my job and I'm struck by the fact that 21 sometimes we loose sight of the fact that the U.S. market is 22 by far the most dynamic, most liquid, most transparent 23 market there is. It is a decidedly short-term market in the 24 global context. Your question as to, is the market 25 different in the last couple of years, not appreciably. It 105 1 2 1 is still a decidedly short-term market. We're the second 2 largest producer in the U.S. We're top ten marketer. The 3 vast majority of our gas, and this is no trade secret, the 4 vast majority of our gas is sold either in the daily, the 5 monthly, or the seasonal market. There's very little of 6 that gas sold longer term than that. So by global standards 7 that's a short-term market. Has that changed? Not a lot. 8 It's probably no secret that there is more interest these 9 days in discussions about LNG. Those tend to be longer-term 10 discussion but that's a dance that's just staring at the 11 periphery at this point. So the market we live in today is 12 short-term. 13 You asked the question about individual 14 companies, have we changed. That I would say largely, no. 15 We've always reported. We've had -- anyone that knows us 16 would know we have lots of control, so we've always had lots 17 of controls over our reporting. 18 We, to give you an insight into how the business 19 runs in our shop, every month we have a marketing meeting

20 shortly before bid week. That's the early part of this 21 week, in the case for July. I encourage our marketers of 22 gas to do some level of fixed price deal making. That is to 23 support the indices. It is not to try to make more money. 24 It is not to try to gain the system. It is to be in support 25 of this system voluntary. And so we do that and have done 106 1 2 1 that. 2 One thing that may be a little bit different is 3 the -- 4 MR. HARVEY: So let me make sure I understand 5 exactly what you said there. You do a certain number of 6 basically index style transactions, forming transactions, so 7 fixed prices around the next month, the next -- 8 MR. NAUMAN: And our portfolio of sales in any 9 given month, any given season, we'll have some fixed-price 10 deals, we'll have some index-based deals scattered 11 throughout the country. We'll do some deals that are priced 12 against the NYMEX, basis deals. And, again, that gets back 13 to customer desire more than anything. From our side, we 14 push and I push the people that work for me to do a certain 15 -- not a fixed level, but I remind them of the need to do 16 some fixed price deal making. You can't have everybody 17 doing index deals, the system won't work. 18 MR. HARVEY: Right. 19 MR. NAUMAN: So any given month and there's no

20 fixed percentage, and depending on volatility and people's 21 desires, there will be a little less index, a little more, a 22 little more fixed, a little less. It is what it is. It is 23 what the market wants. 24 MR. HARVEY: But you indicated that that was not 25 necessarily -- I don't want to say -- I don't want to put 107 1 2 1 words in your mouth, and I can't remember your exact words, 2 not necessarily for commercial reasons for you. 3 MR. NAUMAN: That's correct. That's correct. 4 MR. HARVEY: It's really to help generate a price 5 in the -- 6 MR. NAUMAN: I'm comfortable that over the long 7 haul, if my portfolio includes fixed price deals, basis 8 deals, various index deals which it does, that those will 9 perform equivalently. 10 MR. HARVEY: Okay. 11 MR. NAUMAN: Because the market is that liquid 12 and that transparent. The differences we over time are 13 talking about are on the quarter of a cent, half a cent 14 level. Nothing to do with price swings over time. So, 15 yeah, my point being we're not trying to advantage ourselves 16 by doing fixed price deals, we're trying to support the 17 voluntary system, and I think it does. 18 One comment I would make though about our 19 behavior and changes, with the index publishers, providing

20 more information than they used to and providing information 21 about the number of counterparties and the volumes of trades 22 at certain index locations, we look at that. It's important 23 to us, it's important to everybody in the marketplace. 24 Where we found that a given index point is thinly traded, 25 few counterparties, low volume, we move off it if we're not 108 1 2 1 comfortable. That's a choice we and everybody have and 2 we've done that. 3 And I suspect over time the natural order of 4 things would be that those that are thin and those that 5 aren't in the market's interest will die off. And I have no 6 problem with that. And over time I suspect that certain 7 next points will become even more liquid and become a 8 smaller, but much more liquid and heavily traded question. 9 I have no problem with that either. I think that's healthy. 10 MR. PERLMAN: Can I ask a follow-up question on 11 that. And a few of the other people had talked about this 12 issue as well. And it had to do with the comments made 13 about if there was a mandatory reporting requirement, people 14 would be less interested in doing fixed-price deals and 15 would move to indices which leads me to conclude, as you've 16 just described, that for many of these participants there's 17 an equivalence. There's no business reason to do a fixed- 18 price deal because of an index deal is just as good. And 19 that just seems counterintuitive to me. It would seem to me

20 that if you don't like volatility, you wouldn't want to do 21 an index deal. If you're willing to accept volatility, then 22 you would do an index deal and your portfolio you have a 23 balance and things work out in the end and there's a breath 24 there that allows you to not have to make those kinds of 25 difficult judgments. 109 1 2 1 But I would think, and correct me if I'm wrong, 2 that's really what I'm asking, is there truly an 3 indifference from a business perspective whether you would 4 do an index deal or fixed-price deal such that reporting 5 could tip the balance one way or the other as to which way 6 you would go with your procurement for your business, bottom 7 line. 8 MR. NAUMAN: Well, I'll answer first. Every 9 cubic foot of gas that we sell is just as important to me as 10 it is to everybody else. So I wouldn't want to discount the 11 fact that we're chasing every cubic foot and they're all 12 important. 13 The fact is that if we do a fixed-price deal this 14 month, and then I'm going to -- I could almost turn it 15 around that the gauge of volatility is well, my fixed-price 16 deal compared to index, how did I do? Well, you know, 17 that's because the index is kind of the market standard. We 18 all talk that language. And internal to my company, that's 19 one of our benchmarks, what's the index versus a fixed-price

20 deal? 21 So, again, that's a level of confidence that we 22 have that that's a benchmark. 23 If I do fixed-price deals this month for July, 24 you know, relative to the index given the point, I may come 25 out ahead, I may come out behind. Next month, just the 110 1 2 1 opposite, next month just the opposite. 2 In our case, certainly we can handle that kind of 3 month-in, month-out fluctuation over enough time and whether 4 that's 12 months, 24 months, 36 months, my belief is and the 5 data internally that we look at is that will even out. And 6 so my fixed-price deals to give the location over time, 7 they'll be the same as the index which would be to me 8 intuitively what you would think would happen. 9 MR. HEDERMAN: I also have a follow-up. And then 10 I'd like to see if anyone else on the panel had a comment on 11 it. As you elect to do these fixed-price transactions, are 12 you finding that your customers are interested in doing 13 fixed-price transactions or are they doing it for the same 14 good citizenship notion, if you will? 15 MR. NAUMAN: Well, I'll answer briefly on this. 16 Let me clear up a misconception first of all, that I suspect 17 is out there about how our business works. I mentioned our 18 size and I think people are kind of familiar with that. It 19 may surprise you if I told you that the people that do this

20 trading for us that is not hundreds of people sitting in 21 front of luminescent screens. In fact, if I looked down 22 this table here, the people that sell our gas in the U.S. 23 there are a lot more people around this table than there are 24 selling gas for ExxonMobil. 25 They don't sit and work off of some electronic 111 1 2 1 hub where they don't actually know the customer. The vast 2 majority -- and when I say the vast majority, I'm talking 3 about pretty much all of the gas that we sell. We sell by 4 picking up a phone and calling a customer and asking them if 5 they're interested in a certain amount of gas in a certain 6 place and what price they would be willing to pay. 7 And then we'll ask another and another and 8 another and there are dozens to ask. And that's a good 9 thing. And those dozens that we ask have responses. And 10 we'll ask them, well, how would you like to do that deal? 11 Do you want to price that against Florida Gas Transmission 12 Zone three, Transco Station 85, there are choices in terms 13 of which index. They may come back and say, no, I'd like to 14 do it against the NYMEX for whatever reason. 15 Some say, I'd just as soon do a fixed-price deal. 16 And, to be honest, I don't know. Are they good citizens, I 17 hope so. Are they interested in having a portfolio that's 18 rounded out with some fixed price deals, some basis and some 19 index? I suspect so.

20 In some cases are they hoping to hedge that fixed 21 price and make some money? Maybe that's up to them. I 22 guess the point I would make is, we're actively seeking and 23 actively encouraging a breadth of deal making, not just 24 index deal making, but also looking to find fixed price 25 deals. The reason for people doing it including ourselves 112 1 2 1 is probably many and broad. 2 MR. HEDERMAN: Fair enough. 3 Yes, Mr. Musur. 4 MR. MUSUR: I have a question. Who the 5 customers? Are those end-use customers or are those 6 marketers who are filling their book for their customers in 7 these people who are deciding whether they're going to go 8 with a fixed-price or index or index against NYMEX or 9 whatever. 10 MR. NAUMAN: We are to the bilateral questioning 11 phase. 12 (Laughter.) 13 MR. HEDERMAN: This is regulatory flexibility. 14 MR. NAUMAN: It affects my answer. I'll answer 15 the question and then I'll get out of the way of this. 16 MR. HARVEY: We really are a lot more comfortable 17 with panels that disagree with each other. 18 MR. NAUMAN: Yeah, I understand that. 19 MR. HARVEY: So this is great.

20 (Laughter.) 21 MR. MUSUR: I understand that. 22 MR. NAUMAN: I don't think I'm going to disagree 23 on this one. All of the above. And, again, don't think I'm 24 giving away any commercial secrets. We sell to a whole lot 25 of people. 113 1 2 1 We sell to dozens and dozens and dozens of 2 customers every month, every day. They're different every 3 day, every month. Some are other producers who need it for 4 their refinery. Some are marketers who are going to 5 aggregate gas from small wells in West Texas that I have and 6 they're going to sell it to somebody down the line. Some 7 are industrials, some are LDCs. So we sell gas directly to 8 people that I call "burners" and I really like selling to 9 those because that connects my supply with an end user. 10 Some of it for just practical reasons goes 11 through a marketer. Some of it goes through people that 12 don't look a whole lot different than me, but just happen to 13 have a consuming site nearby. 14 So, when I say "customer" it's soup to nuts. 15 It's very small entities to very large marketers. 16 MR. MUSUR: Okay. Thank you for the answer. In 17 my business, and I don't want to talk for all of my members 18 because we're all different in how we do these things. In 19 the face of volatility, we tend to do more hedges because we

20 want to protect a price that we know that we can live with, 21 not one that we necessarily like. And the more volatile and 22 the worse it looks, the further out we'll start pushing the 23 hedge. And that's what we've been doing. 24 The problem with the market is that it's been 25 contracting in that there isn't a lot of liquidity in the 114 1 2 1 forward months because everybody has pulled back on that. 2 So it's becoming more and more difficult to do. You can see 3 a price, but you can't get it is what it comes down to. 4 It would seem to me that for a producer they've 5 got exactly the sometimes problem. You can't live with 6 index only because the fixed contract is your hedge. And 7 how volatile and how well you think you're going to perform 8 in the market, what direction is this going will determine 9 how much you have to have as fixed contract just to protect 10 your own business and probably has less to do with being a 11 nice guy and want to see the market work. It's part and 12 parcel of the same thing. It isn't a choice between is it 13 all indexes all fixed price. It's where am I going to lay 14 my risk and how much am I going to keep for myself? 15 MR. STRAWN: I think we have one point of 16 consensus here and that is that all of the companies that 17 are involved that I represent and I think some of the other 18 people on the panel represent, all have a different risk 19 level and a tolerance of risk. I think where we start to

20 differ a little bit is how we address that risk. And I 21 think when you start talking about long-term deals, as 22 really some of the others have said here, it is how you 23 compare that versus the index. And if anything, we're just 24 beginning now, I would like to categorize really the overall 25 situation going back to an earlier question of what's 115 1 2 1 happened over the last two years. 2 I would say it's really the two C's, caution and 3 creditworthiness. Meaning that caution and that we're not 4 so much concerned now over the last two years about the 5 price indices that we've been discussing here, we're more 6 concern about price. And just the fact that there's a 7 supply/demand imbalance that's being addressed in a variety 8 of ways, it's just reflective in the indices. The indices 9 aren't really the problem, they're just reflective of the 10 larger problem that we all see in the industry as being 11 currently addressed by LNG and any number of things. 12 But as far as who is the ultimate consumer, I 13 said we represent probably a million and a half people or 14 more that are employed. Throughout this country. But we 15 indirectly affect any number of households and consumers by 16 virtue of that employment. And when I say, "all types of 17 people", I mean, we are in some towns that probably most of 18 the people on this panel have never heard of. These are 19 really the life blood of the United States. And so we are

20 very concerned about the volatility of pricing. 21 But as far as the indices being really the 22 culprit right now, we just don't see it that way. And if 23 anything, if you start to talk about mandatory reporting, 24 because of this competitiveness issue that I addressed 25 earlier, you really start to make people rely more on the 116 1 2 1 index itself to take a shorter position, not a longer 2 position. Right now people are starting to put their toe 3 into the water as they assess more supply options that are 4 apparent in the market. They're starting to get comfortable 5 with the notion of LNG coming in. They're starting to get 6 comfortable with other types of supply that we'd like to see 7 encouraged in the Rockies and other areas. 8 As soon as you start talking about mandatory 9 reporting, then you have a withdrawal of that involvement or 10 more engaging in the overall market. And that's what we're 11 concerned about because people now, because they're 12 concerned about the guy on the other side of the fence, 13 what's he doing? How does my deal compare? So they go 14 index or they use financial instruments. 15 So, if you want more fixed price reporting, we 16 have to believe that really start focusing on the issues 17 that concern us and our opinion which is the supply/demand 18 and equity, not the indices themselves. They seem to be 19 improving and getting better.

20 MR. MUSUR: I don't think this is a discussion 21 about whether the price of gas is any good and whether 22 there's going to be pressure on markets, et cetera. I think 23 from our viewpoint we're looking to reduce as many risks as 24 we can in this. And if there is a risk that the price 25 that's reported by the index is anything other than the 117 1 2 1 consensus price at that point, we should try to eliminate 2 it. That's all we're suggesting. The rest of these things, 3 I mean, you're not going to change the price down from $6. 4 And you're not going to convince the EPA that we shouldn't 5 be doing the mercury mac. That's going to happen anyhow. 6 But to get the other pieces that we can address 7 to remove those risks that don't need to be there is what 8 we're asking you to do. 9 MR. NOVAK: The vast majority of the APGA 10 companies are really small systems, as I said, poor. Some 11 of them have less than 1,000 customers in their system. So 12 when they come in and when Mr. Nauman is talking about the 13 negotiation process and going back and forth through the 14 various customers that he deals with, many of them are price 15 takers. They don't have a lot of negotiating strength. So 16 keep that in mind as you look at this. 17 MR. GERARDEN: I have a question about 18 counterparties. Mr. Henning in the first panel mentioned it 19 as from AGA's perspective as something they would like to

20 see reported by indices. And on this panel several of you 21 have talked about the importance of counterparty information 22 whether it's in the context of mandatory reporting or not. 23 In our current system of voluntary reporting to price index 24 developers, is the industry ready to step forward with 25 voluntary provision of counterparty information to price 118 1 2 1 index developers? It's a step that the Commission stopped 2 short of in the policy statement based on some conflict at 3 the time in the industry as to whether that would be widely 4 agreed upon by industry participants. 5 So my question is, if the Commission were to push 6 for provision of counterparties, would industry participants 7 cooperate with that, or would it result in a decrease in the 8 amount of voluntary reporting? 9 MR. NAUMAN: I can say with certainty you will 10 see a decrease in the amount of voluntary report. We've 11 discussed this a lot not just among the member companies of 12 the NGSA, but with a wide swath of end users. And you will 13 find people, and it's just like this panel, you will find 14 people all over the map in terms of, well, wouldn't be 15 better if everybody knew all the counterparties and you 16 could match them up and there's this theoretical, sure, that 17 sounds great. There is also the pragmatic concern though 18 that as you dig deeper and deeper into the commercially 19 sensitive part of the business, not just the "how much did

20 you sell your gas for", but "exactly who did you sell that 21 gas to" that there becomes some concerns, and I think 22 they're legitimate concerns about having that data collected 23 anywhere, whether it's a publication, a data hub, or 24 anything else. And in the discussions that we've had, and, 25 again, this isn't just producers, and it's not just 119 1 2 1 industrials and it's not just LDCs, there are a fair number 2 of people who would clearly say, if it comes down to 3 choosing, do I report or do I not report? If counterparty 4 identification is the hook that goes with reporting, you'll 5 get some that will say, I'm out. 6 And so I think personally that would be very 7 counterproductive to try to compel people to divulge to a 8 data hub or the publications exactly who they're doing 9 business with. And those commercial concerns run the gamut. 10 They run from producers to end users and in terms of why you 11 would want that data to be out there getting collected by 12 somebody that had full knowledge of who is doing what with 13 whom across the whole market. So that's not anything that I 14 see as being unique to any one segment of the market. 15 But in answer to your question, I think you would 16 see a decrease in the quality of reporting. 17 MR. STRAWN: There is no question that you would 18 see a decrease. I have to echo the same sentiments. And 19 there's just such an overall sensitivity. Just in the last

20 few days we've heard about some involuntary reporting of AOL 21 data. And not to mention the fact that that was an employee 22 of that particular agency. I mean, there are any number of 23 parameters of ways that information can be divulged. 24 Most of our member companies have been coached in 25 the way we even conduct ourselves on airplanes. I mean, we 120 1 2 1 have to restrict our conversations to the news of -- the 2 gossip of the day, like what's happening with Britney Spears 3 or something like that. 4 (Laughter.) 5 MR. STRAWN: As opposed to even hinting, and I 6 really don't mean to bring levity to the conversation, but 7 the reality is, there's been leaking of information 8 involving industrial companies just in the most casual of 9 conversation. 10 Now, if you add to mandatory reporting and then 11 have a number of parties involved in this action, just the 12 casual conversation on an airplane or in a restaurant 13 somewhere, leaks that information and we have a competitive 14 disadvantage, then you have really -- you have affected the 15 way we do business in a free market situation, inadvertently 16 while trying to correct what you perceive as another problem 17 in another area. 18 So it's the sensitivity of the information and 19 just the nature of human beings and the way they discuss and

20 go about their business that we're concerned about. We're 21 not trying to be clandestine in the way we protect our 22 counterparties. We're concerned about how the information 23 is collected, who collects it, and how its disbursed. 24 MR. NOVAK: We would suggest a half step. And we 25 clearly want the number of counterparties reported by the 121 1 2 1 publishers. That's more information that helps us make our 2 own judgments about the points, yet, we are sensitive to the 3 concerns that others have expressed on this panel about 4 confidentiality. And what we would suggest is, rather than 5 a mandate that counterparties be reported, that it be put in 6 the bully pulpit or encouragement. And then with that we 7 could look at our bilateral negotiations when the 8 counterparties have a concern about whether we report their 9 data. So that if we're willing to report it and they don't 10 mind that they're being reported, it's a step in the right 11 direction. And, you know, this is not something that's 12 going to be -- you need to look at the whole process. This 13 is not something that's going to be fixed over night. But, 14 again, if we can get around -- I don't know if we ever get 15 around the commercially sensitive information for the end 16 users, but at least between LDCs and marketers, and the 17 parties that those of us with marketing certificates -- who 18 does he sell to? Maybe at that level we can get this 19 information out there and that would help.

20 MR. GERARDEN: I think that the AGA members would 21 be more willing to provide counterparty data than perhaps 22 producer or end user? 23 MR. NOVAK: I think some of us. Certainly not 24 all because I'm sure there are some AGA members that feel 25 the same way that the end users do. 122 1 2 1 MR. MUSUR: We have the same problem now, it's 2 just that not all the data is in the same place in terms of 3 disclosure. We're just talking about trying to put it in 4 one place that's secure. And confidentiality is a huge 5 thing for us. Because we understand what happens when all 6 of that data gets out. And it does affect us competitively. 7 But, you know, that assumes a market that's 8 reporting prices that don't exist. And I think that affects 9 us even more. You know, there are so many things associated 10 with gas that give us the willies, I can't even begin to 11 count them. Three days ago, article in the Wall Street 12 Journal, it says that the NYMEX is considering hiring 13 Chairman of the CFTC, Jim Newsome, as their president. 14 Well, take a look at the history of the CFTC. I don't mean 15 to slam anybody here, but it looks like a training ground 16 for the NYMEX. You know, people go from there to there. 17 You know, Wendy Graham was the first. I mean, 18 went from the NYMEX right to the board of Enron. 19 MR. HARVEY: I would just suggest we know that's

20 not true for Mike. 21 MR. MUSUR: I understand that. 22 (Laughter.) 23 MR. MUSUR: As a matter of fact, Mike is -- 24 (Off microphone comments.) 25 MR. MUSUR: Mike is going to my alma mater and I 123 1 2 1 couldn't be more pleased. 2 (Laughter.) 3 MR. MUSUR: It's just that it's there are a lot 4 of pieces to this. If we can start shining some light on 5 some of them, it takes away some of the uncertainty. 6 MR. HARVEY: Let me elaborate on this because I 7 think there's a strain through this and a little bit through 8 this morning, the earlier panel, that I would like to 9 explore a little bit. And that's, I think there's a kind of 10 continuum between competition in reporting which we see as 11 kind of a good thing, and the fact that in order to verify 12 having all the information in one place, becomes kind of 13 stronger in terms of verifying which tends to push towards a 14 mandatory and a single sort of place. And there are a 15 number of issues, one of which we've struggled with, and I 16 think you all have struggled with us on which is one of the 17 policy statement requirements of completeness. 18 We had reported today Atlanta Gas Light is a good 19 thing that 85 percent of their activity in the day-ahead

20 market takes place on ICE and it gets publicly -- it gets to 21 the public through that mechanism in a very quick and easy 22 way. And not to have any reason why that is. It almost 23 certainly has to do with sometimes it makes sense to call 24 people, sometimes it makes sense to transact electronically 25 for them. The issue for us was, in order to tell us you're 124 1 2 1 reporting officially, we are worried about companies that 2 might use the ability to contract here and to report here 3 and to report here in a manipulative sort of way. It's one 4 of the things we get paid to worry about in the process of 5 things. 6 That tension, that where it makes sense to lie on 7 that continuum seems to be a pretty active -- you know, 8 actively driving a lot of these concerns. The goodness of 9 having competitive folks looking at sets of data and saying, 10 but not having a complete view at any point in the process 11 is a sort of concern. 12 And, again, a concern that we've been worried 13 about and from a policy perspective on how to make that 14 work. Can you help me on that? I mean, I think I've got a 15 couple of views of this. And I'm pretty clear where we are 16 on the spectrum. It sounds like otherwise people are pretty 17 comfortable letting that work itself out. But should we be 18 worried about that? Is that a possibility for manipulation? 19 I hear a lot of support for our paying attention to those

20 kind of issues and making sure that they don't happen. 21 Is it okay that it's harder for us to do that 22 towards one end of the spectrum versus another? 23 MR. STRAWN: Thank you for those comments, first 24 of all. But I guess one of the things, I want to elaborate 25 a little bit more on an earlier point which will address 125 1 2 1 your question. And that is that really over the last two 2 years with the scrutiny that the Commission has put on this 3 issue, I've never had -- most of my members say to me and my 4 own personal experience of dealing with the markets, I've 5 never had as much caution as we approach the markets. And 6 when I say caution, I mean, most of the people that we're 7 dealing with, our counterparties, everybody is treading 8 lightly now, much more lightly. It's not that they were 9 doing anything incorrect before, in fact, we always strive 10 to work with the highest quality counterparties in every 11 case. But what's different now is that when I talk to 12 someone, no matter how large or small, and I talk to our 13 member companies, everybody is saying, I want to make sure 14 that all the paperwork is correct. I want to make sure that 15 all the reporting is accurate. I want to make sure that 16 there are no questions. I want to make sure it's black and 17 white. 18 And that's a big change from two years ago. So I 19 guess my general point, and I'll leave it alone for the

20 others to comment on, is that you, believe it or not you've 21 infused a lot of fear and concern about the possibility for 22 punitive action into the system right now. Believe it or 23 not. And it's that balance and that -- and I'll just use 24 the word -- "fear" that I think probably prevents the most - 25 - most of the people or the vast majority from even 126 1 2 1 considering doing something in the way of market 2 manipulation. I mean because with Sarbanes, Oxley, and all 3 the other -- people are concerned about going to jail, to be 4 perfectly blunt. So everyone, if you weren't treading 5 lightly before, you're treading very carefully on how you 6 report and who you do business with and how your 7 transactions are reported. And to even hint at doing 8 something like in the way of controlling, I would say that 9 that would have to be on the very low end of the spectrum. 10 So, in a word, I think you've done a good job in 11 putting fear into the system of what could happen, and I 12 think just with that continued scrutiny you maintain that 13 level of fear and proper adherence to good quality control 14 in the overall administration of gas purchasing. 15 Thanks. 16 MR. NOVAK: We would concur that, you know, 17 what's been done is helping. It's making sense. It's good 18 that people are as concerned as has been mentioned. 19 With regard to doing deals at ICE, is it going to

20 wait. We encourage -- we look at the encouragement or the 21 cheerleading role. We support voluntary reporting. If you 22 go out and do a deal on ICE, you're essentially opting in to 23 voluntary reporting for that transaction. That's good. 24 But, also, you need to consider, and we look at 25 this, some AGA companies report, some do not. There are 127 1 2 1 many that are considering. They're evaluating what they 2 have to do to report. And some of the same concern that 3 they want to make sure that they have their process in 4 order. They want to make sure their systems are tight. 5 That's why they aren't there yet, but they're making that 6 evaluation and hopefully they'll be coming around. 7 We've had a few more companies sign up for 8 reporting since the initial round. And that's why we need 9 to continue and let things evolve. 10 MR. O'NEILL: You made an interesting point. 11 Sometimes you go to ICE, sometimes you don't. ICE, 12 obviously, like you said is opting for reporting. ICE has 13 your counterparties, nobody else does. And I assume, you 14 know, you can trust their confidentiality, and for the other 15 members of the panel. 16 How do you decide or when do you decide to use 17 ICE, when do you decide to go bilateral? What is your 18 confidence level in ICE information versus other types of 19 information? We all know that ICE has much better

20 statistics and is only reporting real transactions. I'm not 21 sure that -- I don't want to say that that's happening now, 22 but we knew that it happened in the past. So, how do you 23 make those decisions and how do you use the information? 24 MR. NOVAK: I'm not a gas trader, so I'll have to 25 kind of relate my conversations. It's more of a portfolio 128 1 2 1 approach and that you're looking on any given day, you can 2 do much here, you can do so many fixed price deals, you 3 might do some ICE deals and so forth. And it maybe 4 something that just evolves out of the process of how 5 people -- 6 MR. O'NEILL: But an ICE deal is a fixed-price 7 deal, isn't it? 8 MR. NOVAK: Yeah. What I'm getting at is whether 9 you do a fixed-price deal bilaterally versus a fixed-price 10 deal with ICE. And just in the whole process much of it is 11 the phone calls from day to day, how you feel just on this 12 day, price is working, and what you feel. So I don't think 13 that people are going to ice because they want to report on 14 that day and they don't want to report on another day. 15 All we were saying was that it's good that they 16 can go to ICE and that they opt in on that day because that 17 helps support the voluntary reporting system. 18 MR. NAUMAN: I don't think trading on ICE or 19 Enron on line before it or any other electronic trading

20 platform has really anything to do with people's desire to 21 report or not report prices. 22 It's one of many choices that are out there. You 23 ask how do you decide? It's probably a different answer for 24 everybody that you would ask. For us we use it, we have 25 access to it. As I stated earlier, particularly in the 129 1 2 1 seasonal and the monthly markets, the deal making that we do 2 is bilateral. We want to know the customer. We don't want 3 it to be just a number flashing on the screen. There's 4 reasons for that. The customers often times have different 5 levels of creditworthiness. Customers have different 6 desires. They have something nonstandard in their contract. 7 So the answer is, it will vary and the reason we 8 use it or don't use it, nothing to do with desire or lack of 9 on price reporting, it's a commercial decision. 10 MR. MARTINEZ: Just one clarification. ICE and 11 Enron line mentioned the same line, ICE are bilaterals? 12 People trading ICE is bilateral, people trading on ICE can 13 set up their own credit concerns with counterparties and so 14 just want to clarify, you know, that it's just a meeting 15 point, a platform, and it's not really taking -- becoming 16 counterparty to anybody. So it's just to avoid the 17 confusion? 18 MR. NAUMAN: Certainly if our point -- but I 19 would make the point that it's a dating service of sorts.

20 It will match you up -- 21 (Laughter.) 22 MR. NAUMAN: -- with somebody who is, you know, a 23 green light for you. You know, they have passed a credit 24 test. But that initial matching up, you don't know who they 25 are. And I envision sometimes that when people click on the 130 1 2 1 little green light and ExxonMobil flashes up, they say, oh, 2 God, I got ExxonMobil this time. 3 My point being, for us, and it's going to vary by 4 seller and buyer, for us it's a choice and it's a choice 5 oftentimes to pick up the phone as opposed to rely on a 6 computer screen. 7 MR. PERLMAN: A follow-up question on what Steve 8 was getting at. And I just wanted to see whether people 9 feel that the Commission's component of its policy statement 10 that said, if you report, we would like you to report 11 completely which is report all your trades at Henry hub as 12 well as maybe some less liquid point. And all your buys and 13 all your sells, the whole deal, creates that expectation on 14 the part of the Commission and creates any problems or 15 reluctance to report on the part of anybody who is in the 16 business. 17 MR. NAUMAN: There's a quick answer for me. No. 18 People ought to report every deal they do. You can't 19 selectively report, or you shouldn't.

20 You asked the question, you know, is there a way 21 to selectively game it? You know, the people that game it, 22 the people that are out there trying to manipulate, theirs 23 isn't and in the absence of rigor in the way that they 24 report, it's not an absence of, I left one off by mistake, 25 it's unethical behavior. They're liars, they're cheats. 131 1 2 1 They're wrong. 2 A rule that says, you need to report all of your 3 deals helps minimize the chance for people to go and try to 4 manipulate one or another. And so from my standpoint I 5 can't see any reason why that part of the policy statement 6 would cause anybody a problem. You should report all of 7 your deals. 8 MR. NOVAK: On behalf of National Fuel, my 9 traders would be upset with me if they didn't take this 10 opportunity, weekend deals. The question I was asked when 11 we were going over the policy statement which is, do they 12 really mean all? And I said, each all, that's what they 13 mean. Well, what about on the weekends when we come and we 14 might do one or two clean up deals? They're not going to be 15 reported, do we have to report these? And I said, if we're 16 going to comply with the policy statement, we have to report 17 them. 18 And then it got to be, but why? What does it 19 serve? And I don't know if other companies look at that and

20 they look at the cost of -- you know, there's what you do 21 during the week, the nine to five, Monday through Friday and 22 you might have routine processes in the system speed and 23 boy, each reportable deal goes out. Something happens on 24 the weekend, and it's not that you're trying to hide 25 anything. But it's not the usual process and that may, for 132 1 2 1 some people -- this is what I'm guessing, that maybe "all" 2 shouldn't be all. 3 MR. O'NEILL: Could you describe a "clean-up" 4 deal? 5 MR. NOVAK: A clean-up deal may be where you had 6 a supply that fell through and you're looking at -- you're 7 coming in on Saturday and you see that you're going to be in 8 am imbalanced position, and there are a few other people out 9 there and you can find an alternative source, so you don't 10 want to rely on the cash-out that day. That would be a 11 clean-up deal. Or it can be the other way around where 12 maybe you would make a sale on the weekend because somebody 13 else is in the opposite position and you're capable of doing 14 it. So much of this is on the getting back to the phone 15 calls that people make from day to day. There are people 16 that you conduct business with and they know, you know, who 17 they can call. 18 MR. O'NEILL: And this is someway inherently 19 different from what you do during the week?

20 MR. NOVAK: The difference is that it might be 21 just one or two transactions. Often you most often come in 22 on the weekend and everything is just perfect. But, 23 generally, it's not uncommon, people provide 24-7 coverage 24 for problems, but it's not uncommon for somebody to come in 25 on a Saturday and really just say, okay, let's make sure the 133 1 2 1 weekend is working right. And that's what creates the 2 opportunity to do it. 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19

20 20 21 21 22 22 23 23 24 24 25 25 134 1 2 1 MR. O'NEILL: And this is in some way inherently 2 different from what you do during the week? 3 MR. NOVAK: The difference is that it might be 4 just one or two transactions. Most often, you come in on 5 the weekend and everything is just perfect. But, generally, 6 it's not uncommon -- people provide 24/7 coverage for 7 problems, but it's not uncommon for somebody who'll come in 8 on a Saturday and, you know, really just say, okay, let's 9 make sure the weekend is working right and that's what 10 creates the opportunity to do it. So we report it. It'll 11 get reported on Monday what the rest of the deal is, but I'm 12 saying that's a change that we had to make sure in our 13 system that it did do it. That that deal didn't 14 inadvertently fall off. 15 MR. WEAVER: We believe that at the ABGA that 16 it's the treat of the mandatory reporting that stick us. 17 It's the one that drives a lot of people to look at their 18 deals and make sure that the deals are done and make sure 19 that the deals are reported. It's very important.

20 MR. O'NEILL: You're saying they have threat but 21 never exercise it. 22 MR. WEAVER: Well, if it's necessary, we think it 23 should be exercised. 24 MR. O'NEILL: Okay. 25 MR. WEAVER: We think that still the market is 135 1 2 1 still broken in the way it has reported. 2 MR. WALKER: We believe that it is important that 3 everybody report all of their trades. We support that part 4 of the policy statement. We also agree with the policy 5 statement in carving out affiliate deals because they're not 6 arms-length type pricing. We also support carving out 7 structured deals and find that it takes very careful due 8 diligence in our operation to make sure that when we report 9 we report standard products and do not allow structured 10 transactions to distort the data that we're reporting. It 11 takes very careful due diligence on the part of a deal 12 capture system to make sure that that happens and we do that 13 and believe that that is the spirit and intent of the policy 14 statement. 15 MR. MUSUR: We believe that the indexed system is 16 absolutely crucial to end use customers to make the all 17 natural gas system work and that if we're going to have an 18 indexed system that it needs to report all of the pertinent 19 information that goes into making it indexed. Somebody

20 correct me if I'm wrong, and I'm sure with this group they 21 will, to my knowledge, IC is not a public number. You want 22 to know what the price is on IC, you join or you pay 23 whatever the annual fees are and the connection fees and all 24 that. It's not like picking up a newspaper and finding out 25 what NYMEX is trading gas for today. 136 1 2 1 MR. HARVEY: I will say, at least, as of today, 2 if I understand correctly, it's certainly the way I get IC's 3 number is by request. They will e-mail it to you everyday. 4 MR. MUSUR: But what the indexes do then is take 5 all of these things and they put into a form that we can 6 use. Because in a lot of cases, I don't care what the 7 momentary price of the commodity is. What I want to do is I 8 want to lay in some gas for a week and agree to a price 9 that's an average price published by an index that has all 10 of the data and that's what we're looking for and we want to 11 have confidence in that. We think that all of the 12 information needs to be reported and, if there's some way of 13 doing that other than making it mandatory, someone needs to 14 explain to me how that works. 15 MR. STRAWN: I would just reiterate we're 16 encouraging all of our members to report as completely as 17 possible at all levels at all times and it's really 18 essential the threat of the mandatory that's keep them 19 engaged and putting their toe more and more in the water.

20 And, again, I have to say it one more time until you get 21 tired of me saying it, if you have mandatory reporting, you 22 will have few fixed priced fields and more reliance on a 23 more thinly traded index. 24 MR. HARVEY: I do have one follow-up question 25 that I'd like to ask. I know we're running out of time, but 137 1 2 1 Mr. Novak, you mentioned that AGA had several members who 2 are still looking actively at possibly reporting. Is that 3 because they're getting their confidence in their systems or 4 confidence in what we're doing or what? 5 MR. NOVAK: The expression -- one of the people 6 told me we've got to get all our ducks in a row. We don't 7 want to make a mistake. 8 MR. HARVEY: Just before we end, I'd like to 9 share one antidote here recently for us that we see again, 10 antidotally, as a kind of positive step. We were contacted 11 a couple of weeks ago by a company that reports its trades 12 and said that going into Memorial Day weekend in order to 13 adjust for a four-day weekend, I guess, that prepared for 14 usual trading they wrote some special queries and, in 15 writing those special queries and looking at the results, 16 realized that they probably had some systems problems with 17 their reporting. 18 They did a couple of things that we like a great 19 deal. They contacted their publisher and said we're going

20 to stop reporting until we've got this fixed. We want you 21 to know we're working on it. And they called us and said we 22 want you to know we're commitment to this, but, in reviewing 23 our process, we realized we had problems. We needed to stop 24 and we'll go forward. I kind wanted to throw that as a 25 story in that it gives us a fair amount of comfort that 138 1 2 1 people are taking these processes very, very seriously. 2 That they're using opportunities to double-check those 3 processes and make sure that they work. The fact that it 4 was automated in the first place gets a long way away from 5 sort of trader opinion kind of thing. 6 So, to us, it really has been a great story and a 7 good confirmation, though, antidotal, in terms of that 8 process being taken more seriously. 9 MR. MARTINEZ: Just one last question. I'm very 10 curious on the comment by Mr. Strawn that saying that 11 mandatory reporting would push people away from fixed 12 pricing to indexed. If everybody knew that, then how would 13 you ever rely on an index that even fewer people will report 14 into? 15 MR. STRAWN: This is kind of a chicken or the 16 egg. I'm trying to speak collectively, but, yet, 17 individually at the same time. People are trying to balance 18 their concerns about their competitiveness versus their 19 overall view on the market and it's rare that we have a

20 unanimous opinion amongst our members, but most of them just 21 feel that the overall notion of mandatory reporting, because 22 of the cost associated with it and just the potential of 23 having that competitive influence or that competitive 24 possibility of a leak of information -- they haven't thought 25 through every long-term implication of what could happen 139 1 2 1 with the market, but they know what they're afraid of. 2 They're afraid of the notion that some portion of that 3 information may leak as they consider ever other portion of 4 the long-term effect, they focus on one piece at a time. 5 And, unfortunately, again, if you -- what you 6 don't want is people taking short steps right now. You 7 don't want people taking short and mid-term steps. You want 8 them to take short, mid-term and long. If nothing else, 9 while they sort out what the issues are, they're going to 10 take short and mid-term steps, which is exactly what you 11 don't want in this market because contributes to the short- 12 term volatility. So I don't know if that's the perfect 13 answer, but the bottom line is they know what they don't 14 want and they'll have to sort through what the implications 15 would be if they have to go to mandatory reporting and that, 16 in itself, will create volatility that none of us really 17 want. 18 CHAIRMAN HEDERMAN: I would quickly reiterate 19 during my corporate days there were oftentimes where we were

20 looking at unanimous data and you were assigning 21 probabilities of who was Competitor A and who was Competitor 22 B as part of the exercise. 23 Well, thank you very much for an interesting 24 morning. We have at least as full an afternoon planned and 25 we plan to get going at 1:15 p.m. 140 1 2 1 (Whereupon, a recess was taken to reconvene at 2 1:15 p.m.) 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19

20 20 21 21 22 22 23 23 24 24 25 25 141 1 2 1 A F T E R N O O N S E S S I O N 2 (1:22 p.m.) 3 (PANEL THREE) 4 CHAIRMAN WOOD: Thank you. This third panel will 5 be addressing issues from the perspective of index 6 publishers and other index developers and it's a large 7 group. I hope we can keep up the spark creation level that 8 we had in the last panel and I'm sure it'll be a good 9 variety of opinions here. 10 Steven, you want to get it started? 11 MR. HARVEY: Yes. I'll just remind everybody. 12 I've got a pretty short window. I'm going to hold you to it 13 if I need to, but, as long as we keep moving, that'll be 14 great. We prefer the interaction to the initial 15 presentations. And, with that, let's start with Mr. Weigel. 16 MR. WEIGEL: Thank you. I'm Miles Weigel, Senior 17 Vice President of Argus Media. Argus is the leading 18 provider of price assessments, business intelligence and 19 market data on the global energy and transportation

20 industries. 21 Argus Media supports the Commission's ongoing 22 advocacy of compliance with the policy statement for 23 reporting to the index publishers. The reporting issue had 24 been advanced to a stage that we believe where data 25 providers know precisely what they're asked to do and how 142 1 2 1 they should proceed if they want to submit information. 2 An increase number of eligible companies are 3 responding affirmatively and have been able to yield value 4 for contributing the indices. Argus has been assessing the 5 electricity prices in North American since 1999. While most 6 of the focus this morning has been on the natural gas 7 markets, I'm going to be talking our experience in reporting 8 on electricity. 9 The majority of our price reporting is done by 10 assessment covering day-ahead and forward markets. However, 11 Argus also regularly publishes hourly electricity price 12 indices covering the most active non-ISO trading --. To 13 further add market transparency and consistent with 14 Commission recommendations, Argus will begin publishing the 15 total number of transactions that were used in each hourly 16 index calculation effective September 1st. 17 Argus continues to make progress in broadening 18 the market participation in our hourly electricity indices. 19 However, the progress, we believe, is geographically uneven

20 with cooperation most prevalent in the West. For example, 21 the Pacific Northwest hourly indices have remained resilient 22 during the market downturn of the past two years. There 23 remains an active, vested interest in market transparency by 24 the regional players. 25 In ECAR, the participation remains modest, 143 1 2 1 however, there has not be a material change since the policy 2 statement. In California, the region shows promise and 3 interest for development of more robust, hourly price 4 indices with clarity provided by the policy statement. The 5 remaining Eastern interconnect regions of CIRC, Entergu. SBP 6 Maine of limited hourly price transparency with no material 7 change in contribution since the policy statement. 8 Argus remains concerned that overly prescribed 9 index methodologies do not uniformly best serve the industry 10 and potentially are counter to the goal of increasing market 11 liquidity and price discovery. Market assessments, using a 12 published methodology, remain an important pricing 13 instrument in illiquid markets where a mechanism, deal- 14 weighed index methodology could potentially be skewed. It 15 is conceivable that the parties could be subjected to bases 16 risks associated with a more liquid approved index that, 17 perhaps, is weakly correlated with an assessed market index 18 location more aptly suited for pricing the deal. 19 In closing, it's our view that the ongoing

20 uncertainty with regard to the Commission's next steps has 21 kept many electricity market players on the sidelines in a 22 let's wait and see mode. We hope that today's event can 23 provide insight and allow the markets to refocus their 24 attention on structural issues to support recovery. 25 I'd like to thank the Commission for the 144 1 2 1 opportunity to be a part of this panel. Thanks. 2 MR. HARVEY: Thank you very much. 3 I would like to say before we go on, there's a 4 sort of general logic to our panel -- the first panel this 5 afternoon. It may not be apparent, which is, we wanted to 6 deal with primarily electricity oriented reporting, 7 primarily gas -- reporting and then sort of robustly both 8 sort of in order. 9 The good news about that is we didn't talk much 10 about electricity reporting this morning and so we're 11 excited to hear from folks with a strong focus along those 12 lines as well. And, with that, we'll go to Mr. Johnson. 13 MR. JOHNSON: Thank you. Good afternoon. My 14 name is Brad Johnson. I'm the Global Energy Manager for 15 Bloomberg. Bloomberg is a global provider for pricing data, 16 news and analytical tools for the financial markets via our 17 Bloomberg professional service. 18 I'd like to first start off by thanking the 19 Commission for inviting us to participate on this panel.

20 Bloomberg is committed to supporting efforts to bring back 21 confidence in the U.S. energy markets. And, although we 22 were not as active members of the CCRO Market Pricing, 23 Reporting and Action Committee, we would like to recognize 24 those organizations that participated and provided strong 25 leadership in their efforts and that includes Platts, NGI 145 1 2 1 and ICE as well as market participants, Duke, Phillips and, 2 of course, we want to extend a congratulations and thanks to 3 the CCRO for putting together that industry coalition. We 4 are committed to participating on those kind of coalitions 5 going forward as well. 6 Just for the record, we did, Bloomberg, submit a 7 written response to the Commission staff report dated May 5, 8 dated June 14th, and I believe that has been made available 9 to the public as well. 10 Bloomberg continues to be committed to providing 11 to our global 250,000 customers energy markets reporting, 12 whether that is assessments or indices around the world. We 13 have provided pricing to the energy markets to our customers 14 for over a decade and will continue to do so, whether our 15 customers are using those prices in their contracts or 16 whether they are using them to do historical analysis, 17 correlations with weather data, futures pricing data or any 18 other data that's commingled on the Bloomberg platform. We 19 are committed to providing that to our customers going

20 forward. 21 Bloomberg has the unique position because we are 22 a software provider focusing on pricing. And, although this 23 is not our primary business, as most people know, it is an 24 important piece of our business and we are constantly being 25 reminding by our customers that providing transparency, 146 1 2 1 depth and coverage in the global energy markets is an 2 important part of why they use Bloomberg for energy and we 3 continue to want to seriously look at all alternatives going 4 forward, whether we can use our technology to benefit that 5 effort or simply continue providing pricing to the market. 6 In that regard, over 23 years now we have 7 provided millions of -- pricing to the global markets. We 8 will continue to do so for energy and we're excited to 9 participate in this panel today. Thank you. 10 CHAIRMAN WOOD: Thanks very much. 11 Mr. Onukogo? 12 MR. ONUKOGO: Good afternoon. My name is Ernest 13 Onukogo. I'm the manager of Dow Jones New Wires Indexes. 14 Our offices is based in Princeton, New Jersey. I had to 15 look at my notes to make sure I knew what my name was. 16 Anyway, Dow Jones, as most of you know, has been 17 in the index publishing business, at least on the wholesale 18 side, since late 1995. Prior to publishing our first 19 indexes, we spent about two years or so consulting with the

20 industry and putting together a research and methodology for 21 our initial indexes. 22 I'd like to say that our company support our 23 first efforts to provide transparency to the gas and power 24 markets. We don't currently publish any indexes in natural 25 gas and our strengths are in the electricity. So we're 147 1 2 1 pleased to be on this panel, although I looked at the 2 questions that the previous panel had and I wished I was on 3 that panel instead. So, anyway, we're strong believers in 4 responding to the market's need for information. As such, 5 we are always having a dialogue with the marketplace to 6 ensure that the products that our company produces meets 7 their needs. 8 We feel that it is our responsibility to ensure 9 that the reliability of our indexes -- it's our 10 responsibility to ensure that our indexes are reliable 11 because for us it is vital to our commercial success. We 12 recognize that FERC's responsibilities includes regulation, 13 investigation and prosecution. One thing we did want to 14 add, though, is as a result of FERC's policy statement we 15 have fielded quite a few calls from the smaller index 16 participants. Most of our strengths, as I mentioned, have 17 been in the West, the Northwest and the Southwest part of 18 the U.S. and some of these participants have felt like they 19 did not have the resources to meet FERC's mandate.

20 Our understanding was that FERC's intentions 21 were, of course, to encourage liquidity and we feel that the 22 activities of these smaller players who are probably not 23 here today would be helpful in achieving that aim and FERC 24 can do that by encouraging reporting and to encourage 25 reporting, just make it easier for them to send FERC the 148 1 2 1 type of information that FERC needs. 2 We currently do not feel that there are any new 3 institutions that need to be developed to overcome some of 4 our present challenges. We think that the policy statement, 5 as is, is a step in the right direction with some minor 6 tweaking that we hope we will discuss sometime this 7 afternoon. 8 We understand that as your investigative 9 responsibilities go, Dow Jones will continue to work 10 cooperatively with you to make sure that if there are any 11 price anomalies that that information is appropriately 12 provided. So that's it for me. Thank you very much. 13 MR. HARVEY: Thank you very much. 14 Mr. Sansom? 15 MR. SANSOM: Good afternoon. My name is Richard 16 Sansom. I'm the Markets Editor at Io Energy. We're the 17 publisher of a number of different titles relating mainly to 18 the electricity business. 19 Io Energy has seen an increase in price reporting

20 in terms of index participants and trading volumes, though, 21 there is still a substantial way to go before full and 22 complete representation of market activity is possible. 23 Additionally, confidentiality agreements are now being 24 processed for a number new index participants and some that 25 had stopped providing data in 2002. There has also been a 149 1 2 1 change in attitude for many market participants with regard 2 to collecting price data. With several of the larger 3 participants now looking to provide data or at least open to 4 reviewing their position on whether to submit such data. 5 Much of this progress, initially, seems to be 6 made with regard to natural gas trading with electricity 7 data lagging behind. The situation is, however, much more 8 positive than it has been for some time. Io Energy is 9 optimistic that once this investigation is completed and the 10 situation allowance is settle, then the improvement in data 11 collection will continue allowing a greater level of 12 confidence in published indices. 13 With regard to greater transparency, with data 14 now being provided in an electronic form, Io Energy is able 15 to verify data more accurately and complete any necessary 16 audit of index numbers. Although this data is now provided 17 from the mid office and is processed in accordance with Io 18 Energy's published methodology allowing the index to 19 withstand robust examination and offering a high level of

20 transparency, together with the necessary checks and 21 balances. 22 Much of the recommendations of the policy 23 statement have long been applied to Io Energy's price 24 indices, including the exclusion of outliers from any final 25 index average. With regard to improving transparency, Io 150 1 2 1 Energy is at present automating some data processes which 2 will allow us to more accurately to include the number of 3 transactions in the index. Once this is finalized and the 4 necessary steps put in place to ensure accuracy, then total 5 transaction numbers will be included along with all other 6 data in the published index. 7 To improve the situation further is a need for a 8 greater number of trading companies, which are presently not 9 participating in the Io Energy indices to provide data. The 10 resulting increasing reported trading volumes will also 11 enable Io Energy to provide a more accurate and reliable 12 index in relation to all electricity market activity. With 13 regard to the standards of the policy statement, Io Energy 14 is in broad compliance with the policy statement criteria 15 and with the addition of publishing details of transaction 16 numbers, we'll be in closer accordance with the standards. 17 Proposals for the use of indices in 18 jurisdictional tariffs, one of the proposals may exclude 19 some Io Energy price points from using jurisdictional

20 tariffs. Io Energy will continue to publish confirmed price 21 data wherever it is available. Besides Io market 22 participants, the fullest view of the information available 23 so that they're able to judge for themselves the risk 24 involved in used reported prices in any tariffs. This would 25 also allow the use of Io Energy data in combination with 151 1 2 1 other price indicators or indices in the formation of 2 tariffs. 3 In terms of gas indices, although the same 4 standards are applied to collection and the processing of 5 natural gas data, Io Energy is, for now, firmly a power 6 industry publisher that uses gas data predominately to 7 produce a spread index. In terms of facilitating tariff 8 compliance, Io Energy looks to interfere with the raw data 9 as little as possible for providing index users with the 10 trading volumes that allows potential users to draw their 11 own conclusions on how representative the prices are and 12 whether the more illiquid hub should be used in relation to 13 tariff. 14 While analysts check all data, Io Energy prefers 15 to minimize human involvement and avoid any assessed prices. 16 It is hoped that the increased reporting of trade data and 17 resulting increasing confidence levels will also improve the 18 sample size, providing pipelines and utilities with more 19 options. Thank you.

20 MR. HARVEY: Thank you. 21 Ms. Riner? 22 MS. RINER: Thank you. My name is Bobbette 23 Riner. I'm president of Powerdex. I indexed gas for six 24 months and have been indexing electricity for seven years, 25 so I'm glad to see the afternoon panel. 152 1 2 1 Powerdex is a real-time wholesale electricity 2 trading activity within the WECC. We're a small company but 3 we're committed to a quality nitch product and we're pleased 4 to be here and appreciate the Commission having us here and, 5 therefore, supporting a free market by, not only allowing 6 the competition among energy market participants, but also 7 amongst the larger and smaller index publishers. 8 That's basically represents our attitude in 9 building an index. We're going for the most comprehensive 10 one. You can't have just the top players running the index. 11 That, inherently, can lead to gaming and we want to be a 12 watchdog and help you guys, too. 13 Powerdex is not big upon relying upon online 14 trading platforms or one data hub as an index. If the 15 Commission were to urge relying upon an online trading 16 platform, that automatically omit some players -- some 17 smaller players, those who don't qualify, meet the credit 18 standards and therefore the actual real market is not 19 necessarily represented.

20 If the FERC chooses not to be the actual 21 repository for all the index data, then, we at Powerdex 22 strongly urge against picking a winner amongst the competing 23 publishers and also urge that FERC does not designate an 24 entity whether profit or nonprofit that purports to be 25 independent, yet, takes funding other than subscription or - 153 1 2 1 - license fees from energy companies. Such a practice 2 unravels the independence that an index publisher must have, 3 otherwise, the fox is put in charge of the hen house, not to 4 offend half the audience. Index publishers should be 5 financially independent from energy companies -- no BC, 6 nothing other subscription and -- fees. And then we the 7 publishers should maintain the right to fight for that 8 market share. 9 Powerdex, I have to concur with my colleagues 10 here, we're seeing additional participation. We all 11 experienced a big hit in October 2002 when on the first real 12 threat that people could go to jail for gaming the market 13 and it was probably a year -- a really hard year and we 14 started seeing more participation, not only people who did 15 before, but also others who had not been providing data 16 before. 17 We are going to go out on a limb and say 18 something kind of unpopular, but I'm sure it will be held 19 unpopular. We at Powerdex feel that public policy can be

20 enhanced overall by the Commission requiring counterparties 21 to be identified. That way we can do your work. We can 22 police it and it's not just one set of police. It's every 23 index publisher out there. We just feel like we all have 24 confidentiality agreements in place and obtaining this 25 information will not give the publishers expressed or 154 1 2 1 implied permission to publish or otherwise reveal such 2 information. I understand the concerns, the propriety 3 concerns, but there is an implication that, if your 4 counterparty is sending information on your trade, you kind 5 of have to clean up your act and send the like data and, if 6 it doesn't match up, if there are glitches, then discussions 7 amongst the three, the publishers and the counterparties can 8 clear that up and say, oh, well, we were counting apples and 9 kiwis and we can help police it. Publishers abilities to 10 match those trades serves as a checks and balances and that 11 is, I think, mandatory. 12 As far as the submission of all or none hub data, 13 we can see the pros and cons to such a practice, but either 14 way, could we please get it settle quickly and move on with 15 our lives. That's just what we urge. It keeps the data 16 providers and publishers in a state of flux and there's 17 costly changes on both ends. Also, there's a greater 18 potential for error in delays. 19 Let me just close. We applaud your efforts in

20 cleaning up the markets, making sure they're stable, making 21 sure they work for everybody and we really encourage us to 22 use that carrot instead of the stick approach overall and, 23 perhaps, educate people, particularly, in electricity where 24 indexes are not as widespread. However, we at Powerdex are 25 being used in a number of ways and a couple we hadn't 155 1 2 1 planned on initially. People require this -- the companies 2 require this index. The end users require this type of 3 market intelligence and if the FERC can guide and say this 4 is how it can happen. Don't worry. Things are going to be 5 fine. It's going to go a long way. 6 We concede there's no easy answers for some of 7 these ongoing challenges, but we cheer you on in your 8 efforts. Thank you very much. 9 MR. HARVEY: Thank you. 10 Mr. Haywood. 11 MR. HAYWOOD: Yes. I'm Tom Haywood. (Off Mike). 12 Sorry. Which is part of the energy intelligence group. I 13 don't have a prepared statement. I'm the piker when it 14 comes to this sort of thing, but I will tell you thank I've 15 been indexing prices since the mid-90s. I mean, I started 16 when Bob Epps started. I was in gas. I was at Gas Daily. 17 I was markets editor at Gas Daily. I worked with Platts 18 when they took over Gas Daily, inside FERC as well. 19 I'm now at natural gas -- and I can tell you over

20 the last year we have done remarkable things to reform our 21 tables to show transactional data. I think our data is a lot 22 better thanks to your efforts to push in that direction. It 23 gave me a lot of impetus to reform things and to enhance our 24 actual use of the data that we're getting. That data has 25 also improved and I tell you it's light years better than it 156 1 2 1 was when I started. 2 I mean, it's an amazing difference to get 3 information from the back shops as oppose to the traders. 4 It was more fun talking to the traders. I mean, I enjoyed 5 my job more gathering prices from people you talk to about 6 their kids and you knew who was going to the beach and all 7 this and now really it's just e-mails and it's kind of cold. 8 You miss it but it's necessary because, as I was saying at 9 lunch, when I started daily prices, it wasn't that big a 10 deal. People would use these daily prices when they wanted 11 to go play golf, but within three years we realized it was 12 pretty serious. People are making money on these things and 13 that means there is a temptation to game and, when there's a 14 temptation to game, they mean do you really need to trust it 15 to the horse traders, you know, behind the phones. So there 16 really needs to be a filter and just tell them that they can 17 talk to us about normal market conditions. We don't need to 18 know the prices from them, but I would like to be able to 19 talk to them about what's going on at Drake and why aren't

20 we getting prices up there today. 21 That's it. I would say I'm very glad to help in 22 any way I can to assure you that things have gotten so much 23 better and we are making strides in meeting your needs of 24 the policy statement. People have called me on the phone 25 and talked to me about how well we'll in compliance. That 157 1 2 1 we can use in tariffs. It's all right here. I just say, 2 well, if you want to know the average number of deals per 3 day, it's right here. It's published. You want to know the 4 average volumes per day. It's right here. It's published. 5 We publish weekly, daily, monthly and bid-week 6 prices. Everyone of them, except for the monthly, has 7 volumes involved. Well, the monthlies are generally the 8 same as the weekly, so there's no point in repeating that 9 data. We have a lot of historical there. But, in our 10 monthly prices, we go ahead and publish the volumes. We 11 publish the number of deals that we got. We don't publish 12 how many counterparties we have in the deal because we don't 13 know the counterparties and God help us if we every did 14 because my data base guy's head would pop right off if he 15 had to keep track of that, too. 16 But, if you did require our counterparties, and 17 we could get counterparties in the deal, I have no objection 18 to publishing any information which is available because I 19 honestly feel like these numbers should be as transparent as

20 possible and so people can make their best judgments as to 21 how they want to use them or not use them because that 22 should be their choice. And so, if there's anything I can 23 help you with, please let me know. 24 MR. HARVEY: Thanks very much. 25 Mr. Steis? 158 1 2 1 MR. STEIS: Thanks. Good afternoon. My name is 2 Dexter Steis, Executive Publisher at Intelligence Press, 3 more commonly known as NGI. I appreciate the opportunity to 4 participate in today's conference. We've filed detailed 5 comments in this updating the Commission on NGI's progress 6 throughout the past 16 months. 7 As a journalist by trade, I'll do us all a favor 8 and keep my verbal comments today brief and focus 9 specifically on the bullet points listed for this panel in 10 today's agenda. As mentioned in our filings, and as 11 communicated to the Commission as part of the market price 12 reporting and action committee, NGI has witnessed a dramatic 13 improvement in price reporting under the voluntary system. 14 After receiving 2190 transactions, totalling a 15 trading volume of nearly 15 bcf for the month of April, NGI 16 has seen its survey data plateau at a very healthy level of 17 roughly 1900 transactions and 12 bcf a day of volumes for 18 the shoulder months of May and June. I've passed out a 19 handout that outlines that data and the peak and then the

20 plateau that we've seen in the last two months. 21 Much has been said over the past six months about 22 the dramatic upturn in reporting to publishers and today I 23 have another resource that corroborates that reality. A 24 quick look at the recently published ranking of the top 20 25 traders reveals that the trading volume is concentrated in 159 1 2 1 the top trading ranks, which are dominated by companies that 2 report to such publishers as NGI and that's outlined on page 3 2 of the handout. Well, the ranking is. This was published 4 in a recent NGI. It's the top 20 ranking by sales in bcf a 5 day. 6 For example, the top five trading firms, all who 7 either report or who have told the Commission, in one case, 8 they intend to start reporting, account for a whooping 64 9 percent of the trading volume of the top 20. The top nine 10 traders in NGI's quarterly ranking, either report or, again, 11 have in one case have told the Commission they to start 12 reporting, they comprise 80 percent of those top 20 firms. 13 All tolled, 13 of the top 20 companies are reporting or have 14 said they plan to report to publishers the total trading 15 volume of these 13 account for 86 percent of the top 20, 16 again, illustrating the concentrated nature of the top 17 trading firms, of the volume of the top trading firms, I 18 should say. 19 We bring this to the attention of the Commission,

20 not because we feel it presents a problem, but rather to 21 help prove the assertion that publishers are collecting a 22 very large percentage of the reportable bid-week and daily 23 gas markets. Outside evidence that market's trading can be 24 concentrated is seen in the multi-billion dollar auctions of 25 U.S. Treasury bonds and bills where 23 broker/dealers do 99 160 1 2 1 percent of the buying, according to a spokesman for the 2 Bureau of Public Debt. 3 Because, however, NGI's quarterly ranking of 4 these sales data includes both reportable and nonreportable 5 transactions, it is difficult to compare the data to the 6 nearly 30 bcf a day of reportable price data that NGI 7 receives across both its daily and bid-week markets. 8 However, it does give us a great deal of comfort considering 9 that the top 20 represent more than 100 bcf a day of gas 10 sales or roughly 1.7 times the size of the 60 bcf a day 11 daily consumption figure and that's based on the 22 tcf 12 divided by 265, I believe. So the volumes of those top 20 13 are 1.7 times that figure. So it's certainly a lot of gas 14 we're receiving. 15 As for market transparency, NGI, in July 2003, 16 began publishing tiers to delineate the volume levels at its 17 bid-week trading location. NGI notes the overwhelming 18 interest on the part of the market and the Commission staff 19 to enhance price transparency. Accordingly, NGI plans to

20 publish volumes and number of transactions for each pricing 21 point in its daily, week and bid-week surveys no later than 22 September 1. And, if the gentleman to the left of me is 23 pushing for August 1, then NGI might not want to be left 24 behind. We might be there August 1 as well, so stay tuned 25 for that. 161 1 2 1 NGI agrees with the May 5th staff recommendation 2 that NGI is in substantial compliance with each of the five 3 areas of the July 2003 policy statement. The staff's only 4 two reservations, it writes, are the issue price 5 transparency, which I've just addressed and authority issue 6 of the Commission's access to the data. 7 In order to have a voluntary survey, we have 8 pledged confidentiality to these data providers for their 9 proprietary data. We will be willing to explore procedures 10 with the FERC to cooperate with the Commission where there 11 is evidence of potential price manipulation subject to our 12 signed confidentiality agreements. 13 On the issue of an external audit, NGI is in the 14 process of soliciting bids and selecting an auditor. Once 15 selected, this auditor would work with NGI to determine a 16 set of agreed upon procedures based on NGI's published price 17 methodology. 18 In closing, NGI would like to reiterate the 19 considerable improvements under the voluntary price

20 reporting system. NGI is nearly the full compliance with 21 the policy statement going forward. NGI encourages the 22 Commission to chose what's behind Door No. 2 and continue to 23 monitor the status of price reporting. In exchange, NGI 24 will supply more pricing transparency and continue to 25 furnish the Commission with monthly updates outlining the 162 1 2 1 robustness of trading as well as participate in future 2 conferences here. 3 Again, I thank the Commission and staff for the 4 opportunity and I look forward to the questions and answers. 5 MR. HARVEY: Thank you. 6 Mr. Vice? 7 MR. VICE: Good afternoon. My name is Chuck 8 Vice. I'm Chief Operating Officer of the Intercontinental 9 Exchange. Intercontinental operates the ICE electronic 10 trading platform and the e-confirm electronic trade 11 conformation system. Our market data subsidiary, the Tenex 12 Group also publishes day-ahead and month-ahead gas and power 13 indices based on trade data from these two systems and my 14 remarks are fairly brief. 15 Since the release of the policy statement last 16 year, ICE/Tenex has lead publishers in embracing the 17 standards, including among other things contractual 18 commitment to data confidentiality, employee code of 19 conduct, independent audit, and a transparent, unambiguous

20 index methodology. In further adherence to the policy 21 statement, ICE/Tenex began publishing, in addition to 22 volume, the number of transactions and the number of 23 counterparties for each index. With regard to data access, 24 Intercontinental has a long history of cooperation with 25 regulatory subpoenas received pursuant to market 163 1 2 1 investigations. 2 With these key conditions met, Intercontinental 3 has requested that its indices be deemed in full compliance 4 with the standards of the policy statement under adoption of 5 staff recommendations by the Commission. 6 In late 2003, Intercontinental made another 7 important improvement to its indices when it began including 8 non-ICE trades from its e-confirm system in the ICE/Tenex 9 month-ahead gas indices. Today a total of 66 trading firms 10 submit over 30,000 gas, power and oil trades per months for 11 e-confirm for confirmation. During the most recent bid 12 week, e-confirm contributed 18 percent of the transactions 13 constituting the ICE/Tenex month-ahead indices. These 14 transactions included trades executed directly between 15 counterparties as well as trades executed by seven different 16 voice brokers. 17 Intercontinental projects that e-confirm will 18 grow to contribute over 50 percent of the transactions 19 making up these indices by year-end. Just last month

20 Intercontinental made a further enhancement to its 21 month-ahead indices when it began publishing a bid-week 22 indications report at the conclusion of trading on each day 23 of bid-week. This daily report provides a volume-weighted 24 average at the conclusion on each day of bid-week. This 25 daily report provides a volume-weighed average of price and 164 1 2 1 total volume by pub of all bid-week trades executed that day 2 on the ICE trading platform. 3 In addition to being an index publisher, 4 Intercontinental, as I've said, also operates an exchange, 5 so I would like to make a brief remark concerning liquidity. 6 Since much of today's focus has been on the gas markets, 7 these remarks pertain specifically to power. In January of 8 this year, ICE began offering clearing of financial power 9 trades for seven hubs with another three to follow in July. 10 These cleared power slots settle on LNP prices at hub, such 11 as PJM and New York ISO and on ICE/Tenex day-ahead indices 12 at hub, such as Palo Verda and mid-Columbia. 13 In the last few months, 37 different 14 counterparties have executed 4000 transactions on ICE and 15 through voice brokers for a total of 150 million megawatt 16 hours. These cleared financial power volumes, growing at 17 over 30 percent per month, now regularly top physical power 18 volumes. 19 Moreover, because power markets haven't to now

20 made little use of indices, participants are free to make 21 fully informed decisions regarding which indices they want 22 to use. As a result, Intercontinental believes that the 23 price transparency in the power markets is already well- 24 served by proliferating LNP markets and numerous index 25 publishers in a non-LNP market. Thanks. 165 1 2 1 MR. HARVEY: Thank you. 2 Mr. Foster? 3 MR. FOSTER: Thank you. My name is Larry Foster. 4 I'm Global Editorial Director for Power at Platts. As most 5 of you know, Platts has been an active participant in this 6 proceeding for the last year or more and we recently filed 7 extensive comments on June 14th. I wont rehash those, nor 8 will I talk extensively about the progress to date. But, 9 just to summarize briefly, changes that have been made from 10 a year or 18 months ago. 11 We now are receiving all data from our company's 12 back offices, certified by officials of that company. We 13 are receiving transaction level rather than aggregated data. 14 We have clearly specified standards for the data that we 15 want from data providers. We have provided much more 16 detailed public methodologies of how we calculate our 17 prices. And both we, and the data providers, are now 18 subject to compliance reviews of their reporting. 19 On the topic of greater market transparency, for

20 natural gas we already are providing volumes for all of our 21 daily price survey and for the Tier 1 monthly points. 22 Beginning August 1st, assuming we can work through all the 23 implementation details in time, we intend to provide the 24 number of transactions as well as the number of volumes for 25 all daily points and for the top two tiers of our monthly 166 1 2 1 survey. 2 Tier 3 are the relatively illiquid points. We 3 don't feel there is much to be gained by showing measures of 4 transparency for those points. And, under the FERC 5 criteria, they couldn't be used in tariffs anyway. So I 6 think, basically, that point is moot. One note on the 7 metrics that the staff report lays out, along with volume 8 and number of transactions, the criteria used number of 9 counterparties. Unlike, ICE, which knows the counterparties 10 in every deal, we do not get counterparties in our press 11 reporting for all transactions. We get them for some and 12 Platts has consistently advocated in favor of counterparties 13 throughout this proceeding, but we don't get them for a lot 14 of the deals that we capture and so we simply can't provide 15 that measure. 16 In our power survey, we will publish the volume 17 and number of deals for each daily price that is based on at 18 least five deals and three sources. As you've heard from 19 the proceeding speakers, the power market still is

20 relatively thin and we're forced to do assessments at some 21 of the points that we report. We think that there's general 22 agreement that using a volume-weighted average price in a 23 very thin market does not necessarily lead to good price 24 discovery. We will modify our current standards to rely 25 more on volume-weighted averages than is now the case and 167 1 2 1 our written comments provide more detail on all of these 2 points. 3 As Dexter mentioned, participation in the price 4 surveys is up substantially for the most recent five-month 5 period. Our monthly gas survey volumes are up 35 percent 6 and transactions are up 38 percent compared with the five 7 months immediately following issuance of the policy 8 statement. Likewise, transactions and volumes are up in the 9 daily gas survey and the power survey as well. 10 Platts believes that all participants or all 11 market players should participate in surveys. The gentlemen 12 this morning from AGL cited cost as one reason not to. We 13 have worked with many, many companies that have had to 14 implement new systems. That have had to install all kinds 15 of internal controls as, indeed, Platts has. We have 16 increased our compliance staff from one to three. We have 17 spent considerable time and money to improve our technology 18 over the past year. We have incurred substantial legal fees 19 throughout this process.

20 We feel that incurring these types of costs is 21 simply the price you pay for transparent markets and that 22 companies should be willing to pony up. 23 As we have said in writing since January, we 24 believe that we meet the policy statement standards. The 25 second key question, along with the increased market 168 1 2 1 transparency posed in the staff report, is on access to 2 data. We have a standard confidentiality agreement that 3 Platts attorneys developed. We also have signed the SUCA 4 agreement developed by the CCRO with a number of companies. 5 Both of these cover the eventuality that the government 6 makes a request of us for disclosure of data. 7 Since this staff report was issued, we have had 8 discussions with FERC staff about this issue of access to 9 data. Those discussions are ongoing. It's an active topic 10 of debate within MacGraw-Hill and we continue to hope that 11 we can reach some sort of agreement with the Commission on 12 this issue. 13 We would encourage you not to phrase the question 14 as starkly as "will price index developers provide FERC with 15 access to data in the event of an investigation?" The 16 answer simply is it depends. In my mind, that question is 17 akin to saying to a pipeline will you accept our decision on 18 the justness and reasonableness of your transportation 19 rates. I don't know. It depends on what you put in front

20 of me. So we feel we simply cannot sign a blank check, but 21 we certainly hope to be able to cooperate with the 22 Commission on this. 23 I also might note that we have worked voluntarily 24 with Mr. Gorman's oversight staff at the CFTC regarding 25 data, a number of NYMEX basis swaps settled against our 169 1 2 1 prices and the CFTC must assure itself that those points are 2 valid and liquid and I think we have tried hard to provide 3 that division of CFTC with information it needs. 4 I'd like to talk just for a second about 5 technology. In a recent interview in Energy Risk magazine, 6 Chairman Wood called for "a 21st Century approach towards 7 price formation. One that doesn't require a lot of faxes 8 and phone calls and the old technology that we still have in 9 the gas sales industry. A whole lot of business depends on 10 a few flimsy pieces of data that come out of every data 11 market." 12 I'd like to assure the Chairman and the 13 Commission that that simply is no longer the case. Platts 14 does not accept data by phone call. There may be a few 15 isolated, kind of emergency cases where we accept prices by 16 fax, but virtually all of it is submitted electronically and 17 imported directly into proprietary data management systems 18 that we have developed. We are in the process of beta 19 testing a web-based data submission system that would allow

20 providers just to go a website and dump their data in 21 directly so that we don't have to rely on e-mail. 22 Platts, in other markets, such as oil in 23 Singapore, has tested electronic platforms as a data 24 collection system, not to trade on, but simply as a means 25 for us to collect data. So I feel that we are in the 21st 170 1 2 1 Century in our technology and I'd also like to emphasize 2 that in our daily price survey we now are collecting more 3 than 2000 transaction these days. So it is not based simply 4 on a few deals. With that, I'd be happy to take any 5 questions. 6 MR. HARVEY: Thank you. 7 I'd like to start by asking this question. It's 8 apparent a lot of work has been done on part or a variety of 9 these things. One of the issues that was important to us 10 and remains important is clarity around the methodology and 11 that's really to give information to those people that make 12 use of your information in an effective way. 13 I haven't done a real careful look and so I'd ask 14 this question of, I think, many of you. Perhaps, not Mr. 15 Vice because I don't think he does this. But, in many of 16 your publications there are both indices in the sense of 17 these kind of spot electric and gas indices and there are 18 other assessments of price, maybe foreign prices, other 19 things. How would I, as a reader, and would I, as a reader,

20 be able to distinguish very clearly between times when 21 there's a very specified kind of methodology around an index 22 versus when there's a lot more assessment to it and what 23 would I need to look at and it is clear that there is a kind 24 of difference there in terms how they're calculated and how 25 they're figured? I know there are assessments that are 171 1 2 1 made. They're used as part of the journalistic exercise. 2 Is it clear? Can I tell just sitting down with your 3 material? And maybe just start with Larry and work our way 4 back down here. 5 MR. FOSTER: Sure. In our daily gas survey, our 6 methodology is such that we do not do assessments. For 7 better or worse, we report a mid-point based on the volume- 8 weighted number regardless of how limited the volume. For 9 our monthly survey, yes, we feel it's clear. If we're 10 performing an assessment, there's an asterisk next to the 11 number that is reported and you go to a footnote and it says 12 this was done using an assessment methodology. We have 13 details, separate power and gas methodologies posted 14 publicly on our website that go into excruciating detail on 15 the differences between volume-weighted indexes and 16 assessments. 17 In our power survey, we do do a number of 18 assessments. Those are recognizable because they have no 19 volume number attached to them. When we begin reporting

20 transactions and volumes August 1st, we will be revamping 21 our price tables, so it's possible that in a month or two 22 they may look slightly different, but we are very sensitive 23 to this need to carefully distinguish between the two. 24 MR. STEIS: NGI, too, does not do assessments in 25 its daily gas price index. In its weekly gas price index 172 1 2 1 and, in bid-week survey, we did resort to the use of 2 assessments during the market dip that we saw in late 2002 3 and early 2003. I believe we had a six-month period where 4 we posted assessments and marked those prices with an 5 asterisk and that was detailed in the footnote and I don't 6 have the information in front of me, but I do not believe 7 we've published an assessment in the last six months with 8 the robustness of trading volume that we've seen. 9 COMMISSION PERLMAN: Can I interrupt and just ask, 10 just for clarity, do you ever publish sort of regular price 11 information that you do not consider an index? That is 12 something else. That's some sort of price indication for, 13 let's say, electricity for January of '05 that's not an 14 index, but you publish it regularly and is that true, first 15 of all? And, secondly, if it is, do you distinguish in your 16 documentation that that is a journalistic assessment or some 17 other price indication, but does not have the same level of 18 rigor that an index would have? 19 MR. STEIS: I can jump in on that real quick. We

20 do publish a bases survey in our bid-week survey that takes 21 in all the physical bases transactions that we've received 22 during the last three-day settlement period. And, while we 23 do not publish assessments in that chart, I can honestly say 24 that it is not clear from the footnote that that is the 25 case. So I think in this case maybe a little bit more 173 1 2 1 clarity in that footnote of that table is called for. 2 MR. FOSTER: We do report forward prices, for 3 example, for both gas and electricity, which are 4 assessments. Our methodologies, again, clearly indicate 5 that that what they are. In terms of the presentation, the 6 table headers do not use the magic word "index" which has 7 kind of taken on this connotation of a volume-weighted, 8 quantitative type number as opposed to a journalistic 9 assessment. So I feel that they're clearly differentiated. 10 This was one of the questions posed in March. I don't think 11 there was any comment really submitted that said it wasn't 12 clear to industry participants. 13 MR. HAYWOOD: Mine will be a short answer. I 14 mean, basically, you know, when we do an assessment because 15 we have very limited information, what we do is we publish 16 the number, but we put no transactional data. It's 17 indicated by -- all transaction data is marked out so that 18 we're showing that this isn't really based on the same level 19 of activity that we would actually publish a number against.

20 We do have one table, we do a citygate table 21 during bid week where people do not actually trade at these 22 particular citygates, but they're based on well-known 23 tariffs and such. So those are all assessed values, but 24 that's more informational than anything. You know, it's 25 kind of interesting to see where Austin, Texas is going to 174 1 2 1 land at a price based on the transport from, you know, 2 blank. But I don't think anyone is actually trading on 3 that, but, to answer your question, we wouldn't but 4 transactional data against that. 5 MS. RINER: When I created the first hourly 6 indexes in the country, I set up a methodology that request 7 assessment -- no, well, it requires fake pricing in some 8 points. It's called indicative pricing. No trades are 9 reported. There's no trades garnered for that particular 10 hour because we're talking about 24 hours in a day at 11 sometimes illiquid hubs. We learned quickly from traders 12 that we can't just put zeros up there. We have to have 13 something. We did not know this. I'm at another company 14 and that is the part of the methodology that kept the same, 15 but, ironically, we are forced to use some assessments now 16 as a result of all this focus, the Commission's report last 17 summer and the way the things are falling out in the 18 industry, we have found that our providers are very 19 reluctant to provide indicative pricing. We had a set

20 methodology. We used the tightest bid -- spread by 21 obtaining that for the hours that we required from different 22 players and now no one will provide that. So we have 23 developed a proprietary formula based on various factors, 24 but we have always clearly indicated that this is zero 25 volume. We've always shown volume. But that's the only 175 1 2 1 assessments and I hate to do assessments. We've being 2 forced to. I'll take any feedback. Thank you. 3 MR. WEIGEL: Just from Argus perspective, in 4 terms of our hourly indexes in our published methodology, we 5 describe exactly where prices are assessed versus their 6 generated calculated indices and our hourly indexes that we 7 publish, the volume for the particular hour will be 8 indicated as zero and described in the footnote in the table 9 that the information, again, is an assessed value. It has 10 no volume against it. Actually, the color is also 11 different, a different color, but in case those are being 12 printed out in black and white, there's a zero next to it. 13 So it is very clear. 14 I would also just toss out there, I'm sure we 15 don't want to spend significant time on it, assessments, I 16 don't believe are a bad thing and I'll leave it at that 17 point. 18 MR. SANSOM: I just wanted to say that within the 19 indices we don't actually publish assessments, but they will

20 be referred to in any editorial commentary that's gone on 21 with the markets. But, generally, in indices there's no use 22 of assessments. 23 MR. ONUKOGO: For the Dow Jones indexes, we 24 always publish a price and a volume. So, any time there's a 25 volume associated with a number, our readers knows that 176 1 2 1 there were physical transactions that occurred at that 2 particular index point. If there were not any transactions 3 reported, then we will use an assessment price and we will 4 indicate that by putting an zero of volume and there's a 5 footnote at the bottom so people know that physical 6 transactions did not occur at that level. 7 MR. MOCEK: Good afternoon. I wasn't here this 8 morning. My name is Gregory Mocek. I'm Director of 9 Enforcement, the CFTC. I know I've had a dialogue with some 10 of you over the past couple of years. 11 Before I ask my question, which is going to be 12 directed towards access to data by the government, something 13 near and dear to our heart, I want to commend the FERC, 14 under the leadership of Chairman Wood for doing a quality 15 job in not only exposing the problems that existed in the 16 price reporting area, but also fostering a dialogue between 17 private industry and regulators. I don't think there's a 18 better way than a forum like this to figure out exactly 19 where we can come to a solution that will not have

20 detrimental impact on industry. 21 With regard to access to data, FERC and the CFTC 22 have jointly done, probably, in access of 50 false 23 reporting, manipulation investigations over the past two 24 years. During those investigations, we have routinely 25 shared information through access letters and done what 177 1 2 1 we've needed to do to cooperate with the Justice Department 2 and the other members of the President's Corporate Fraud 3 Taskforce. 4 In the process of attempting to gather the 5 information to figure out exactly whether our statutes were 6 violated, a number of companies that are here today had 7 decided to sort of privileges under the privileges that are 8 possible, specifically, journalists privilege with regard to 9 information requests that we made on the data that was 10 collected by certain companies. As we sit here today, the 11 larger question, I think, is index providers collect 12 information every day that affects citizens in every state 13 in America. It affects the pocketbooks of consumers and I 14 would like to know the downside of allowing criminal and 15 civil prosecutors unfettered access to the information that 16 you collect without assessing a privilege upon that 17 information. I'd be more than happy to take the answer from 18 anyone. 19 Mr. Foster, would you like to comment?

20 MR. FOSTER: Mr. Mocek, as you well know, our 21 company is in court with your agency. I'm not accompanied 22 by counsel here today and I'm not prepared to answer that 23 question on my own. 24 MR. STEIS: Without the confidentiality 25 agreements that we've signed with our data providers, there 178 1 2 1 would be no data and there would be no survey. We've signed 2 our own confidentiality agreements. We've also signed the 3 DSUCA and that specifies that, if we are to turn over data 4 to a governmental agency or in a subpoena, we are bound to 5 notify the company and have that company use any protective 6 measures that it may use to keep that data confidential. 7 We are willing to work with the Commission on a 8 set of procedures that would allow us to uphold this 9 confidentiality that we have with our sources, while 10 cooperating with the Commission and the CFTC to monitor the 11 market and I'd be interested to have meetings with the CFTC 12 and the FERC to discuss what those procedures might be. 13 MR. HAYWOOD: Again, this is Tom Haywood. You 14 know, that's an interesting question and we do wrestle with 15 this. We talk about. I mean, because -- and I know you're 16 not talking about fishing expeditions. I mean, you're not 17 saying you just want to come in and take a look at all of 18 our stuff and see if you see anything that's unusual or 19 something that draws something to your attention, which is a

20 huge difference from your coming to us and saying, you know, 21 I believe that Company X has been manipulating data for 22 purposes of doing this and we want to see what they've been 23 reporting to you as opposed to what other people have been 24 reporting. 25 It's a whole difference. I'm sure there's 179 1 2 1 something that can be -- some procedure that could be put in 2 place to sort of codify exactly what constitutes a 3 reasonableness. I mean, you can't just say, no, we can't 4 give you anything because of these protections because that 5 wouldn't fly any in case, especially, if it's a criminal 6 situation where a person is criminally liable for fraud or 7 something. So, no, we wouldn't be hard fast against some 8 sort of procedure, but we're with Dexter. We'd kind of like 9 to talk about what exactly -- what constitutes 10 reasonableness. What exactly are you all looking for, under 11 what conditions so that we can cooperate. 12 MS. RINER: We would like to see written 13 guidelines for, as Tom said, what constitutes reasonable 14 suspicion or probably cause to launch such an investigation 15 and the compelling reason for Powerdex's confidential data 16 to be compelled. Powerdex will submit, if compelled, but we 17 urge you to, instead, give us a bit more leeway in helping 18 you police by mandating counterparties. 19 MR. HAYWOOD: Can I ask one question? What

20 Dexter was saying is a very good point. We have agreements 21 with people and part of those agreements almost always 22 stipulate that, if we are to turn over information to an 23 agency for some sort of investigation, we have to tell them 24 about it before we do that. I don't think we -- I mean, 25 then they could do what whatever they want, but then we turn 180 1 2 1 it over, but we have to notify them. I mean, that would not 2 be a problem, would it? 3 MR. MOCEK: Well, in certain situations it would 4 be a problem, but the overarching issue is not informing the 5 target that we may be looking at, although, in certain 6 situations, indeed, that can be problematic as you could 7 might imagine. But, just failing to turn over the 8 information when you receive a subpoena because the 9 confidentiality thing exist now at exchanges where they do a 10 fine job at maintaining the confidentiality of the thousands 11 of companies that trade or thousands of individuals that 12 trade upon their platforms and/or their exchange. So I 13 could see that it would be fairly easy to figure out a way 14 to cooperate in giving us access to the information when you 15 receive the subpoena. 16 MR. HAYWOOD: I think it would just be helpful if 17 we worked out guidelines so we would understand. We all 18 could agree that, yeah, this work or show us exactly what it 19 is.

20 MR. STEIS: Can't the CFTC get the data from the 21 company? 22 MR. MOCEK: If the company maintains the data. 23 MR. STEIS: Under the policy statement, isn't the 24 company required to maintain the data? 25 MR. HARVEY: You may not be aware of our policy 181 1 2 1 statement. 2 MR. MOCEK: No. I am aware of the policy 3 statement and I'm not going to speak to the policy statement 4 because I think FERC's better off speaking to the policy 5 statement. But I can tell you from the CFTC Division of 6 Enforcement's perspective, there was a lot of data that 7 wasn't available by the companies or that was deleted by the 8 companies or that the companies simply didn't maintain or 9 somehow lost. It would have been much easier if we had 10 gotten it from the index provider rather than going to the 11 companies and searching through 50 companies for the 12 information. 13 I can tell you a lot of taxpayer dollars were 14 lost in doing that. Millions of taxpayer dollars were lost 15 in searching for information as we did these investigations 16 because we had to spend countless man hours and woman hours 17 figuring out exactly what information was left and then 18 trying to somehow extrapolate that information to figure out 19 what else was possibly report and/or false reported.

20 MR. STEIS: So these are past abuses? 21 MR. MOCEK: Correct. 22 CHAIRMAN WOOD: Just keep in the mind the 23 question that Greg asked was not about confidentiality 24 agreements, which are not unusual among participants in the 25 business world that have the type of provisions that you're 182 1 2 1 talking about. That's something that the government deals 2 with all the time and private parties deal with all the 3 time. The issue he asked about was, why do you think it's 4 appropriate for you to raise the fences that those private 5 parties don't because they don't have available to them with 6 respect to things like the journalist authority to protect 7 its sources type of thing in this context I think is what 8 he's asking. You want to put yourself, and maybe you have 9 good reasons, but that's your judgment, in a special class 10 that other parties to confidentiality agreements don't have. 11 So I think the confidentiality agreement is really sort 12 beside the point because that is not uncommon at all and 13 those provisions are relatively standard. It's really 14 saying that these organizations have a special status and 15 the information sharing with the government should be 16 addressed different because of that special status. Is that 17 fair? 18 MR. MOCEK: Uh-huh. 19 MS. RINER: Excuse me, but media, historically,

20 has not has special privileges. I don't get where we get 21 that and I'm not sure why we would be compelled to squeak -- 22 well, I know in the past the companies did not have to keep 23 their data or they obviated the issue, but we have been 24 committed to keeping the data and I think there should be 25 conventional procedures put in place, just as we're working 183 1 2 1 on here, but the burden lies with the companies. 2 MR. JOHNSON: In Bloomberg's June 14th letter 3 submitted to the Commission, we addressed that issue 4 directly. I just want to read that into the record. 5 "Bloomberg offers a standard confidentiality agreement to 6 market participants that wish to contribute trade data. 7 That agreement includes a provision to allow the Commission 8 to access data otherwise deemed confidential." And, 9 particularly, that provision currently reads as follows 10 "such confidential information may be disclosed by recipient 11 to state or federal courts upon their order or to state or 12 federal agencies, including FERC, upon their request, 13 provided in either instance the prompt notice of such order 14 or request is given by recipient to disclosure if such 15 notice is legally permitted." 16 And then following the Commission recognized that 17 Bloomberg satisfied this condition and it commented in the 18 May 5th report Bloomberg states more affirmative that the 19 standard confidentiality provisions of its agreement permit

20 Commission access to confidential data upon order or request 21 and notice to the effective date of provider. 22 MR. HARVEY: Yes, Larry? 23 MR. FOSTER: I would just like to make a couple 24 of limited comments. I think contrary to what a lot of 25 people may believe, Platts has not resisted every subpoena 184 1 2 1 we have received. We have received a number of subpoenas 2 from this agency, from Mr. Mocek's agency, from the Justice 3 Department. We have done our best to cooperate with those 4 agencies and to provide what information we feel we can. We 5 have litigated those cases only when we felt it was 6 essential. 7 Our parent corporation's business model, the 8 MacGraw-Hill's company business model is based on being a 9 publisher and based upon the protections from liability 10 suits that come with being a publishers. So, if you want to 11 ask, well, what makes us a special class? That's it. We're 12 a publisher. You know, Dynegy or El Paso or whoever isn't 13 and I don't believe -- I'm not an attorney and I'm probably 14 going out on a limb here, but I don't believe the legal 15 standard for obtaining data from a publisher is whether you 16 can get it more easily from us than you can from some other 17 source. 18 MR. GORHMAN: I agree with that point, Larry. 19 One other thought that I had is that there may be

20 instances in the course of investigation where it would be 21 useful for an agency to compare data that is obtained from 22 the company with data that is submitted to an index 23 publisher to determine whether they're essentially keeping 24 two sets of books. Keeping one thing on their books that 25 they provide to us, but actually reporting something 185 1 2 1 different in terms of investigating a potential false 2 reporting claim. 3 MR. FOSTER: And one further point, as I said in 4 my initial statement, we have talked with FERC staff since 5 the staff report was issued, before the FERC staff report 6 was issued and we will continue to talk with FERC staff 7 about access to data in a limited investigative context. 8 Mr. Mocek's question, I believe, was about publishers 9 providing "unfettered access." I think that's an entirely 10 different issue. 11 MR. MOCEK: We are in litigation with Platts and 12 I'd rather not get into a specific dialogue about our issues 13 with Mr. Foster. I don't think it's proper, but I can say 14 that I, as well as the Division of Enforcement, CFTC, are 15 firm believers in the protections outlined by the 1st 16 Amendment. But, when it comes to price discovery, the 17 protection of speech should not outweigh the integrity of 18 the marketplace. And, when I say "unfetter access" I mean 19 unfettered access in response to a government agency or a

20 government department that has nationwide subpoena authority 21 given to that institution or that body by Congress and 22 that's what I meant by that. 23 I appreciate the dialogue. I think it's healthy 24 and I think it lays out, not only our positions, but your 25 positions and I understand that confidentiality is paramount 186 1 2 1 because that's where your business lies and we understand 2 that. We completely understand that and we're more than 3 willing to work with you to make sure that confidentiality 4 is maintained in all circumstances. 5 CHAIRMAN WOOD: I'd like to take advantage of 6 this group for a topic that came up this morning. In light 7 of several of you, not every one of you, dealing with other 8 commodities. The point about the uniqueness of natural gas 9 came up. I'd be interested if you have any observations 10 about whether you find natural gas to be more unique or more 11 similar to other commodities that you cover, whether energy 12 or others? Does anybody have a comment to make on that? 13 Tom? 14 MR. HAYWOOD: Well, natural gas doesn't seem 15 rational sometimes. 16 (Laughter.) 17 MR. HAYWOOD: You always say energy intelligence 18 is an oxymoron there, but it's a -- I think natural gas 19 tends to, and I believe it has to do with a lot of

20 commodities. It often trades on what people thinks going to 21 happen as opposed to what happening. Maybe more so than 22 some other commodities, which increases the volatility. I 23 mean, you'll be trading incredibly high prices because 24 there's going to be shortages down the way, which may or may 25 not occur because prices were so high now. It's just one of 187 1 2 1 those things. Of course, you can say the same thing about 2 oil, but oil just seems more concrete and it seems to have 3 more firm bearing on its pricing than sometimes I see in 4 gas. But I've seen some weird things in gas prices that I 5 never would have thought possible, but they've happened. 6 CHAIRMAN WOOD: Yes, Mike? 7 MR. WEIGEL: Clearly, one of the commodities 8 that's not in the spotlight in terms of this sort of 9 climate, but in the spotlight in terms of price volatility 10 is the coal markets. So, when you've been sitting around at 11 $23 a ton for 30 years and you're at $66 a ton in a matter 12 of six months, that generates a lot of attention. The coal 13 markets certainly act very differently from natural gas, but 14 the ways in which the coal markets are priced, assessed or 15 indexed, certainly, are remarkably differently than nat gas. 16 So, perhaps, coal being a market that will have a little bit 17 more visibility with this organization at some point, but 18 right now I just thought I'd offer that as a market 19 observation.

20 MR. O'NEILL: Do you think that the coal price 21 followed the gas price up? 22 MR. WEIGEL: Pretty much, the coal market 23 dynamics have been very much a supply situation. So, 24 certainly, the coal markets were stressed by the fact that 25 natural gas became a very expensive fuel and it became 188 1 2 1 economic to search for coal supplies that were a lot more 2 economically cheaper. Coal is enormously complex and the 3 transportation components of it don't make it a simple 4 answer to give you. But, certainly, the price changes that 5 you've seen in coal have, to a large extent, been driven by 6 forces that are even outside of this country, the growth of 7 China, the freight market for transportation around the 8 globe. So we're no longer just an isolated little island in 9 the coal markets right now. We're very much driven by 10 international forces with natural gas included. 11 MR. HARVEY: I'd like to follow up on another 12 issue that came up earlier and I'll start by apologizing to 13 Mr. Vice. It's another one that's not really relevant to 14 ICE, so I will ask a quick ICE question, which is, was I 15 right this morning? Can people get into Tenex and get the 16 daily e-mails still. 17 MR. VICE: Yes. It's pretty broadly available. 18 I think about 7000 people get that every day. 19 MR. HARVEY: I just wanted to be sure and ask you

20 a question. The question I have relates to what several 21 folks pointed out. Without counterparty information, you 22 can't really give participant information in indices as we 23 mentioned and we probably didn't think that through and we 24 weren't completely clear about that in the staff paper. Let 25 me ask you a different and specific question. Would there 189 1 2 1 be a problem or would you foresee problems in publishing 2 information in areas about numbers of sources? 3 MS. RINER: I'd like to take that, if I may? 4 MR. HARVEY: Sure. 5 MS. RINER: That is a big concern for us in our 6 nitch market where we're covering the hourly indexes. It's 7 of some consideration. It's not as though it were a problem 8 to build in the variables to display that. Our concern, 9 overall, is with protecting our participants identities and 10 we don't want to unmask them in any way. Now the hourly 11 indexes, inherently, are physical. There's no paper trades 12 in there. You can't protect people by all this great volume 13 you'll see in the dailies. It's energy. 14 We're talking about in the West some kind of 15 esoteric hubs. We have clients who require them and we have 16 some people doing load falling. They're just buying a few 17 megawatts for a few hours out to keep the lights on, 18 basically, and we're concerned with identifying the number 19 of participants and hope we can get some kind of guidelines

20 here that will allow us a bit more leeway such as to number 21 the participants in a quarter, say, but just say the number 22 of participants for each hour -- I mean, you're going to 23 say, oh, that's so and so with so and so. That unit was out 24 or they were testing another unit or what not and we're 25 really concerned about that. So, in fact, we have complied 190 1 2 1 with everything except that and we're not sure how to deal 2 with it without hurting the market by unmasking 3 participants, so we appreciate your feedback on that and 4 suggestions. 5 MR. STEIS: So the idea would be we'd publish 6 volumes, number of trades and then number of participants? 7 MR. HARVEY: Yes, sort of separate participants 8 in any particular area to get at, again, that sense of are 9 these a lot of trades by two people versus are these a lot 10 of trades by 10 people or whatever. 11 MR. STEIS: Yes. NGI has no problem doing that 12 if the Commission were to suggest it. 13 MR. HAYWOOD: You know, again, though, that can 14 be so misleading. Let's say you have two major players, 15 say, in the Chicago market where you had the utilities out 16 buying and you're getting 20 reports from two utilities, but 17 they're also dealing with 10 counterparties each. So, 18 actually, you're dealing with trading from sources that 19 might amount to 22 sources, but you're only to put two down

20 there because those are the only two you can actually verify 21 are behind these deals. So it's a little misleading. Now, 22 if you did counterparty -- if you insisted that people do 23 counterparties, then we could cross-match and say there are 24 14 participants in these transactions and that would be a 25 more valuable indication of where that is. But, of course, 191 1 2 1 if you're going to publish the number of transactions and 2 the total volume at the point, it's still going to give you 3 a relative idea about the liquidity of that trading so that 4 you would know that you may have 100,000 volume, but it's 5 really one deal or three deals that comprise that or 20 6 deals that comprise that. But, unless you did 7 counterparties, it would be misleading. 8 MR. O'NEILl: Let me ask this. Have any of you 9 considered doing buyer and seller Herfendahl indices? 10 MR. FOSTER: No. 11 (Laughter.) 12 MS. RINER: Do you mind repeating that one word? 13 MR. O'NEILL: Buyer and seller Herfendahl 14 indices. They're a weighted average of the -- in other 15 words, you'll have big traders that will show up as very 16 large Herfendahl indices. And, if you have concentration on 17 the buyer's side, they'll show up. It's a single index, so 18 it doesn't indicate exactly how many buyers or how many 19 sellers, but it weights them by the volume that they're

20 selling and that's what we used in anti-trust analysis and 21 in market analysis here all the time to see whether or not 22 the market is competitive. 23 MS. RINER: That would help compensate. I used 24 to cover the dailies and the forwards, I guess, at Synergy. 25 We needed that there, you know, seeing both ends of the 192 1 2 1 spectrum. In the West, where you have a couple of players 2 per hour and a really off peak hour, a real esoteric season 3 and then at Synergy we had two players notoriously, probably 4 80 percent of the time, doing massive volumes, massive 5 volumes and no one else wanted to enter in and they could do 6 it on an online platform. They could do it wherever they 7 liked. Well, CFTC went after one and the other no longer is 8 in business, so I've seen both ends and, perhaps, that would 9 be one way to compensate for a trading activity where there 10 are others who either cannot or don't need to participate or 11 they are intimidated because there are two people playing in 12 volume. 13 MR. O'NEILL: And there's no new information you 14 need to make those calculations. You have all the 15 information. 16 MS. RINER: Love it. 17 MR. ONUKOGO: We'd like to concur with what Tom 18 Haywood said, actually. For us, we believe that publishing 19 price in volume and high loads and the number of

20 transactions is a good idea, both for the number of 21 different counterparties. We're not 100 percent sure we 22 completely understand what the logic or how relevant that 23 information is, for one. 24 The second thing for us is it would be difficult, 25 once again, without getting counterparty information on all 193 1 2 1 our transactions to be able to give the public the accurate 2 number of how many different counterparties were involved in 3 that transaction. 4 MR. MOCEK: How do you ensure the integrity of 5 your index without requiring counterparty information? 6 (Laughter.) 7 MR. ONUKOGO: I assume that question is for me to 8 answer. Correct? There's a couple of -- I mean, without 9 going into extensive detail on how we publish indexes, we 10 begin every single day by having an idea of where the market 11 is, not necessarily where the index is going to settle, but 12 where the trading ranges are for any particular hub, whether 13 it's an on-peak or off-peak data. And we isolate prices 14 that are outside that particular trading range or prices 15 that are even within that trading range that have extensive 16 volume. Now we go out and confirm anything that's an 17 outlier. And, if, for some reason, we're not able to 18 confirm a particular price, then we will not use that price 19 as part of the index.

20 And one important thing that's a concern for Dow 21 Jones is also double counting. We've been at several WSPP 22 meetings where we've been arguing extensively to have 23 counterparty information supplied for the indexes. We were 24 at a situation where almost like 80 percent of all our data 25 participants were sending counterparty information until a 194 1 2 1 couple of developments happened down the line where some 2 companies were concerned that there may be violation of 3 certain agreements. So, as a result of that, we now just 4 use one side of the transaction. And we think that, in 5 terms of trying to assess liquidity, that we're able to get 6 counterparty information. Dow Jones, in particular, will be 7 able to publish -- 8 CHAIRMAN WOOD: I'd like to ask a question about 9 that. We were told this morning, and we're told all the 10 time, that if we were to require or to say that to meet our 11 policy statement goals counterparty information was required 12 people would simply choose not to report and you would see a 13 big drop off in reporting and it seems like you're asking us 14 to require people to give you information you'd like to 15 have, but you might have the consequence of losing a lot of 16 information, which seems to me to be a bad thing. 17 Secondly, I'll just point out that with respect 18 to your confidentiality agreement issue, I know that that 19 the EEI master agreement group has put an optional agreement

20 that's standardized on their website made available for 21 everybody a standard of provision to the EEI agreement, at 22 least, that I would think would work with any master 23 agreement that would permit the information to be provided 24 without any problems with confidentiality agreements. But 25 that's for your information. 195 1 2 1 We were told again this morning don't go near, in 2 response to Ted's question, don't go near counterparties 3 because the information well is going to dry up. Is that 4 not something we should pay attention to? 5 MR. HAYWOOD: I never said you needed to do that. 6 I mean, I was just saying to if you want the number of 7 counterparties -- I mean, if you want the number of people 8 participating in transactions, you'd have to get people's 9 counterparties and I don't know. I'm kind of in agreement. 10 I don't think it's necessary and, if it's something that's 11 going to hurt price reporting, I wouldn't bother because it 12 isn't a terribly relevant number. It's more interesting 13 than anything else. 14 And I just want to go back to the weighed 15 averages and using both sides of a transaction and not being 16 able to wash one out because you know who the counterparties 17 are and matching. Like I said, I've been doing this for 18 many years and I've seen them where you did and you didn't 19 and really it washes out. It pretty interesting how it

20 doesn't really seem to have that big an effect and I believe 21 there are exchanges that do wash out. That don't use both 22 sides of it and, if you look at their numbers and our 23 numbers at the larger -- you know, at points, they're really 24 pretty identical. So it doesn't really have an effect. We 25 learned very on that it washes out. It's okay. 196 1 2 1 MR. GERARDEN: May I follow up on that with Larry 2 Foster in particular because that's Platts pre-conference 3 comments, you finished up by saying that you support 4 provision of counter-party data. How do you see the 5 balance, if the Commission were to require that to be 6 provided in a voluntary reporting scheme, how do you see the 7 balance between the value of the counter-party data to the 8 publishers versus the risk of losing participating? 9 MR. FOSTER: It's a good question, Dave. It's a 10 balancing act and we're trying to walk a very fine line 11 here. You're right, Platts has consistently said that we 12 advocate providing counterparties. Getting back to Mr. 13 Mocek's question about how can you be sure or how you have 14 the highest confidence in your indexes without 15 counterparties. I think we consistently have said having 16 counterparties would give us the most confidence in our 17 indexes. We're in an environment where there's a lot of 18 competing considerations that have to be made here and we 19 would like within a voluntary price reporting system to see

20 companies step forward and provide us counterparties. But 21 we also believe that what you heard this morning is true. 22 That, if you went to a mandatory structure and required 23 reporting of counterparties, that it would be 24 counterproductive. That fixed price steelmaking would dry 25 up. That everyone would index. That indexes would be based 197 1 2 1 on very little data and it would be not a good solution. 2 So the answer is just we're trying to balance 3 what we've got to work with as best we can. 4 MR. GERARDEN: And the balance you see there is 5 would be best for the Commission to urge voluntary provision 6 of counterparty data as opposed to making it a requirement? 7 MR. FOSTER: Yes. Absolutely. 8 MR. ONUKOGO: Yes. We agree. 9 MR. STEIS: And just to add to that, time is on 10 our side. I think that we've come a long way in the past 18 11 months to the low point in November of 2002 and all the 12 transactions that we're now receive are coming from a main 13 or back office, signed off by a corporate risk officer. 14 They are coming in Excel spreadsheets. The data is all 15 provided and I think that going forward as these companies 16 get comfortable with that procedure, get comfortable with 17 the confidentiality agreements that they've signed with the 18 publishers that they might and they may warm to the idea of 19 voluntarily submitting counterparty data, but I don't think

20 that they're ready yet and I think it would come at the 21 expense of the survey data that I've outlined in my original 22 comments. 23 MR. HARVEY: I have one last question. We're 24 going a little bit long on time, I know, but my last 25 questions, which, again, I don't think it applies to ICE. 198 1 2 1 Say I was in the business. Say I wanted to report 2 electricity and gas prices to all of you and I did it 3 through my mid-office, my back office and I generated a 4 report, would I need to generate eight different kinds of 5 reports to report to all of you or could I do something 6 generic and send it to all of you? 7 MR. STEIS: I can jump in on that real quick. 8 NGI recognizes that these data providers may and should be 9 reporting to more than one index publisher and, because of 10 that NGI makes no specifications as to the arrangement of 11 the data within the e-mail or the spreadsheet. We only 12 require that the fields consistent with the FERC policy 13 statement are there -- the date of transaction, the volume, 14 the price, the date of flow, but we don't have any 15 specificity as to the arrangement of the data. 16 MR. HAYWOOD: Agreed. 17 MR. WEIGEL: Agreed. 18 MR. FOSTER: Actually, Platts does have a 19 requested format that we've worked long and hard with

20 companies to follow. When you're dealing with masses of 21 data, it helps to have a standardized format. Having said 22 that, we would never reject anybody's data because it did 23 not fit our format. 24 MR. HARVEY: Well, if I'm hearing correctly, if I 25 used your format, I could send it to Russell in the same 199 1 2 1 format and that would be okay with you, too? Okay. 2 MR. GERARDEN: At the risk of going a little long 3 on the panel, this morning we heard from the first two 4 panels some concerns about suggestions in the staff report, 5 the recommendations to the Commission about minimum criteria 6 for an index to be used in jurisdictional tariff and one of 7 the concerns raised was measuring, over some historical 8 period, an index's context of a number volumes or number of 9 transactions. If the Commission were to adopt some 10 standards for indexes to be applied in jurisdictional 11 tariffs, would index developers be able to provide 12 historical data that you have, perhaps, you may not have 13 published it but you may have the data. Would you be able 14 to supply historical data for purposes of testing indices at 15 index trading points against criteria the Commission may 16 adopt? 17 (All agreement.) 18 CHAIRMAN WOOD: Okay. Thank you very much. I 19 think we'd just like to switch over into the fourth panel

20 and keep going here. So, if you could just take a stretch 21 and get the panelists changed. Thank you. 22 (A short recess was taken.) 23 (PANEL FOUR) 24 CHAIRMAN WOOD: To the extent problems continue 25 around price reporting that they're largely reflective of 200 1 2 1 the broader liquidity problem and we want to solicit some 2 opinions and insights on that broader question and that's 3 what we've invited this panel to address and we do 4 appreciate your coming and we will begin on that. 5 Steve? 6 COMMISSIONER HARVEY: Let's go ahead and get 7 started with Mr. Martz: 8 MR. MARTZ: Thank you. I'm Martin Martz, Manager 9 of Compliance for BP America, Northern American Gas and 10 Power Business Unit which oversees natural gas, power and 11 natural gas liquids trading and marketing in Houston. I 12 want to thank you for the opportunity to be here today. I 13 thought I would start in part of my overview remarks, first 14 of all, to address what, from a trading perspective, the 15 concept of liquidity entails and it's fairly simple from a 16 trading perspective. It indicates that there are -- a 17 liquid market would be one where there are a number of 18 buyers and sellers such that a trader is able to exit his 19 position and a deep liquid market would be one where there

20 are a large number of buyers and sellers and it's important 21 that you have both buyers and sellers in the market, not 22 just a group of buyers and one seller or a group of sellers 23 and one buyer. You need a combination for there to be a 24 liquid market. I think, also, it's important to recognize 25 that liquidity and price reporting do have a relationship. 201 1 2 1 The relationship I would suggest is that liquidity supports 2 a strong price reporting scheme and provides confidence in 3 the prices reported. 4 I think, as you have heard earlier, when you talk 5 about those points at which there are not a lot of 6 transactions, price reporting agencies do not have as much 7 confidence in the price and turn to assessments. A liquid 8 point, on the other hand, would have a number of data points 9 that the price reporting agencies could rely upon in order 10 to develop a better price. 11 I think also that over the last several years 12 there have been a number of factors that affected liquidity 13 and credit is one of them. The Eron-related factors would 14 be another. You saw those two kind of combine together to 15 take a number of folks out of the trading market, the 16 Williams, the El Paso, due to some extent, Aquillo. And, as 17 those folks have left the market, there have been fewer 18 parties there who have been willing to be on both sides of 19 any transaction with people on both sides of the transaction

20 serving almost, in effect, as market makers. You have a 21 more liquid and deeper market. 22 Price reporting may be a part of that as well, 23 but I think that the liquid market will help further the 24 price reporting policy. 25 In terms of where we stand today, I think we have 202 1 2 1 seen liquidity did die off in 2002, perhaps, early 2003. 2 Since that point, I think, you can look at it from several 3 points, but from the NYMEx perspective, liquidity is what I 4 would describe as reasonably good in the prompt month and 5 probably the yearly stripe. As you go out beyond that time, 6 from a trading perspective, it becomes much more difficult 7 to get anything done. There are fewer participants, fewer 8 people willing to take position out there. 9 I think the same can be said true for the fixed 10 price market. It may vary from point to point, but for a 11 goodly number of the trading points that are reported within 12 the various price reporting agencies you will see a 13 reasonable degree of liquidity. There are some other points 14 that rate as a two or three within their scheme and they are 15 much less liquid. When I look over the information from 16 Platts, for example, on their website, I think we're in the 17 neighborhood of 30 to 36 points that are now at Tier 1, 18 which indicate good liquidity, I would suggest. 19 I would suggest that, in terms of the questions

20 that you have put out, a good trading hub is one that is 21 there a good liquid market with a good number of buyers and 22 sellers and, at those points where you have good liquidity, 23 you're seeing good price reporting, seeing good prices and 24 price indications. 25 Effectively, what is needed to enhance liquidity 203 1 2 1 at some of the other points and overall is additional 2 participants to step in, perhaps, people to step up and 3 become market makers, willingness to a position on either 4 side of the market to recognize that when parties do that, 5 they're doing that, simply taking a short-term position, 6 expecting to get out of it in short order, may, in fact, 7 even be expecting to get out of it within the same day. 8 Those are kind of my overviews and thoughts from 9 the PB perspective on the liquidity situation. I'd be more 10 than happy to answer any questions you have after everybody 11 else goes. Thank you. 12 COMMISSIONER HARVEY: Thank you, Mr. Martz. 13 Mr. Edmonds? 14 MR. EDMONDS: Good afternoon. My name is Chris 15 Edmonds and I'm president of the Energy Brokers Association. 16 I welcome this opportunity to share our perspective. The 17 Energy Brokers Association represents not only over-the- 18 counter brokers, but also organizations such as NYMEX as 19 well as Intercontinental Exchange and, collectively, I would

20 say that we represent a substantial or super majority of all 21 of the transactions that are not just direct, bilateral 22 transactions between companies that happened in North 23 American Natural Gas and Electricity. 24 That, on behalf of the EBA, I appreciate this 25 opportunity to offer our view in what we believe the current 204 1 2 1 levels of liquidity are available within the energy trading 2 sector. As intermediaries, we're always concerned about the 3 level of trading activity in the current trading 4 environment. Is it going to go up? Is it going to go down? 5 That's how we're compensated, so it's very near and dear to 6 us as you might imagine. 7 The EBA and its members are committed to 8 supporting ongoing efforts to improve the index volumes, 9 their creations, such as in the case of electricity and 10 credibility for both the sector and the pricing mechanisms 11 employed by the industry. The Commission and Commission 12 staff have commented on four potential opportunities, 13 courses of action going forward. Like a number of people 14 who have spoke today, we think that Option 2 of continuing 15 to monitor the market activity around data collection in 16 those participating is the right choice, at least, at this 17 time based on the information we have available. 18 It is possible that members of the EBA could 19 support an independent data hub, but only if an independent

20 data hub was put forth in a very concise manner in a 21 business plan that is detailed enough for us to understand 22 what it implications it would have for our business. To 23 date, we have not seen a proposal that we would find 24 acceptable. 25 Members of the EBA believes the market is headed 205 1 2 1 in the right direction by mandates or concerns therefore, 2 future mandates. The industry realizes it must provide 3 reliable, accurate and transparent information if it is to 4 grow. New market entrants will not participate if this is 5 not the case. New market entrants or participants are 6 developing almost on a weekly basis. I think if you would 7 survey our membership would find that at least one of us 8 sees a new customer, a new trading entity in some form or 9 fashion. It's not a UBP. It's not a new marketing company, 10 but it someone who has the ability to take a position and 11 enter the market, whether it's futures related, OTC related, 12 what have you and we feel that's a positive indication and 13 we feel this positive indication is that market concerns are 14 much less today than they were 12 months ago because we 15 weren't seeing that 12 months ago. Twelve months ago, I 16 might have had to say the inverse to you. 17 The questions the staff put forth to this panel 18 there are a couple of things and I'll just make a brief 19 comment on one. You asked about liquidity. I would say how

20 do you define adequate liquidity? Certainly, Martin gave an 21 adequate definition of what liquidity is, but does that mean 22 it's adequate everywhere? That's a risk decision that our 23 customers make each and every day. 24 I would offer up that our customers look at the 25 certainty of the markets. Will it still be there? Can they 206 1 2 1 get in? Can they get out of certain positions? It's that 2 certainty that they're trying to understand and make risk- 3 based decisions on that. I would say the last thing is we 4 think there are five value drivers that run liquidity within 5 a market. One is credit quality and I don't think you can 6 underestimate the amount of important that has. Just as 7 different cities, if you want to think about a municipality 8 has different pockets of credit quality within a 9 geographical area, so does our industry in some respects 10 and, if you see a large concentration of lower credit 11 counterparties in one location, you may see more activity. 12 You can't discount what that means to the people who want to 13 enter in that market space. 14 Obviously, the price of the commodity is 15 something that we have to focus on. Volatility, you know, 16 moderate volatility is something that the market for a very 17 liquid hub would accept. Extreme volatility, everybody just 18 gets out of the way. It becomes way to expensive and you 19 can't predict where it's going. Obviously, you have to have

20 the players that Martin talked to about and I'll come back 21 to this word "certainty" again. All of these things are 22 going to continue to be there. 23 With that being said, I'd welcome any questions 24 that you all may have for us. We again thank you for the 25 opportunity to share our perspective and be here today and 207 1 2 1 look forward to participating in the solution going forward. 2 COMMISSIONER HARVEY: I'm going to digress for 3 just a second. I grew up in Atlanta, Georgia and moved to 4 Houston, Texas. It took about a year and a half to realize 5 that when people said "UT" they didn't mean University of 6 Tennessee. 7 (Laughter.) 8 COMMISSIONER HARVEY: In this building, whenever 9 we schedule meetings with the Energy Brokers Associations it 10 creates much confusions because the EBA means something 11 different in this building than Energy Brokers Association, 12 but it's fun to see the confusion as it happens. 13 Mr. Sahay? 14 MR. SAHAY: Good afternoon. I'm Pankaj Sahay 15 from Price-Waterhouse-Coopers. Before I begin, I wanted to 16 make a couple of points. 17 First, the topic that I will address talking 18 about the role of the independent audit and reviews was more 19 suited to Panel 2, but, I guess, because of the popularity

20 of the morning session and afternoon flights, they managed 21 only to put me on a later panel. Thank you for that. 22 The second is the usual disclaimer that the views 23 expressed are mine and not that of Price-Waterhouse-Coopers. 24 PWC is a firm that provides both assurance and advisory 25 services. In the advisory service in the area of the risk 208 1 2 1 management, reliability audits, transaction services, 2 regulatory support, among others. But today I wanted to 3 focus on the role of independent reviews in the price 4 reporting process. 5 While the work in the finance auditing world is 6 well-known, less known is our work in doing the audits of 7 market operators as Mike would know, since he worked at 8 PJMISO. We worked on numerous occasions to assist clients 9 and markets on reviewing the operational processes, 10 evaluating the risks and controls and providing assessments 11 related to both the process and technology improvements. 12 Speakers before me have eloquently spoken about 13 the importance of price liquidity and described the process 14 from transaction initiation to price publishing, so I'll not 15 go into that. It is sufficient to say that it's a very 16 critical process and there are a number of risks related to 17 both people, process and technology that could occur 18 throughout the cycle. There is a framework that has evolved 19 and, for those who have the presentation, it's on slide 6.

20 And this framework is widely used. It was created by the 21 Committee of Sponsoring Organization of Treadway Commission 22 and it's commonly known as a Corso framework. 23 What this does is, for any process, be it price 24 reporting or more commonly right now the focus is on 25 financial reporting, you can classify the process in a 209 1 2 1 maturity cycle, which is very very well defined and it 2 ranges from the process being unreliable all the way to 3 being fully optimized. And price recording is one process. 4 Right now, if you ask different participants, they'll 5 provide different ways in which they're doing it and this 6 framework does provide a comprehensive framework in which 7 you can classify where they are. 8 The unreliable stage is described in 9 unpredictable environment at the initial stage at the 10 maturity cycle where control activities are not designed or 11 in place. And most unreliable processes co-exist in 12 environments with little or no automation and enabling 13 technologies. 14 The second stage is the informal stage where 15 control activities are designed and in place, but are not 16 properly documented. Process with informal control 17 activities result in an environment where the processes are 18 ad hoc in nature and have heavy reliance on manual 19 activities. Progressing to the next stage for a business

20 process is a standardized stage where control activities are 21 designed and in place and are adequately documented. 22 Processes with standardized control exhibit mature 23 deployment of supporting technology and integrated systems. 24 Moving to the more mature levels of being 25 monitored stage, there we have standardized control with 210 1 2 1 periodic testing for effective design and operation with 2 reporting to management. Technologies that allow the 3 process to become standardized make it easy to test the 4 controls and, hence, monitor it periodically. 5 Finally, in the maturity cycle is when the 6 process is optimized and, at that stage, integrated controls 7 with real-time monitoring by management and continuous 8 improvement takes place. And, with real-time monitoring, 9 typically, is founded on integration of the disparate 10 systems and the ability to control the result of the data 11 and communicate it in an efficient manner and technologies, 12 such as XML and XPRL and data transportation standards, such 13 as web services are used to enable the final stage. 14 In summary, independent reviews does provide 15 objectivity and transparency. It leads to formalization of 16 procedures that are typically required for auditing. It 17 provides an efficient means to mitigate the risks and it 18 provides an incentive for documentation and standardization. 19 And, depending upon the nature of the distribution, as one

20 of the panelist before talked about, agreed upon procedure, 21 there are different ways in which you can distribute the 22 findings, agreed upon procedures being one, slide 17, and 23 reporting under the consulting standards. Thank you. 24 COMMISSIONER HARVEY: Thank you. 25 Mr. Jepperson? 211 1 2 1 MR. JEPPERSON: Good afternoon. My name is Tom 2 Jepperson. I'm Division Counsel for Questar Market 3 Resources. I want to thank the Commission for this 4 opportunity to share comments on this important conference. 5 Questar is an integrated gas company with an LDC 6 interstate pipeline company and an unregulated provision for 7 its producer-gathering marketing business with operations 8 primarily in the Rockies and the mid-continent regions. 9 I'm here today representing Questar's upstream 10 and midstream units, including its trading company. My 11 comments will not be directed to Questar's regulated 12 businesses or to pipeline tariffs use of index prices. 13 Rather, my views will reflect those of a producer. 14 Reports by the Market Price Reporting Action 15 Committee and the index developers are encouraging that 16 eventually most market participants will voluntarily 17 participate in fairly and accurately reporting their cash 18 market fixed price transactions to the index developers. 19 Without question, there has been substantial

20 increase in market participants's confidence in the process 21 of price discovery and index development, which, heretofore, 22 was relatively absurd, except to the index developers. 23 While staff's report of May 5, 2004 confirms that 24 substantial and meaningful progress has been made in the 25 transparency of price indices as well as in the number of 212 1 2 1 parties reporting and the number of transactions reported, 2 there is still room for improvement. 3 Questar agrees, and therefore supports, Position 4 2, that the Commission should continue to monitor and 5 encourage industry to adopt the Commission's policy 6 statement and to commit to full and fair reporting of its 7 cash market fixed price transactions that form the basis of 8 the price indices. However, if continued improvement is not 9 made, then Questar would support Position 3 for some type of 10 mandatory reporting. And, noting there that comments 11 earlier were that, perhaps, there might be some exemption 12 for small entities. That the cost would be burdensome. 13 While evidence of renewed confidence may exist 14 among market participants, there is still a great deal of 15 work to be done to restore confidence of the public and 16 other stakeholders of energy transactions. For example, the 17 Minerals Management Service came out on May 5th of this year 18 with its final rule pertaining to oil royalty evaluation. 19 It adopted a NYMEX price instead of spot market prices. It

20 stated "use of the NYMEX price is the basis for royalty 21 value has several advantages, not the least of which is that 22 the volume of transactions and the number participants are 23 so large that, at least, theoretically, no one entity could 24 manipulate the result in price." This is an issue partly 25 because of the recent publicity and questions about the 213 1 2 1 information provide to spot price reporting services and the 2 effects such potentially inaccurate information has on spot 3 prices in general. 4 The MMS has indicated that it will shortly 5 published proposed rules for gas royalty evaluation. 6 Hopefully, the MMS will continue to use spot price indices 7 as one of its benchmarks for valuing gas, but a lot hinges 8 on the outcome of these proceedings. In the past several 9 years, the gas-producing industry has been plagued with 10 royalty valuations claims in the private arena, challenging 11 the use and reliability of index prices, among other things. 12 Even though many of the claims are frivolous, they are 13 incredibly expensive to defend. Without question, we need 14 to do whatever it takes to have price indices stand up in 15 court, even if it means mandatory reporting. 16 We do not only need solid price indices, but we 17 need as many market points of liquidity as can be reasonably 18 developed. For instance, a couple of years ago, the 19 Colorado Supreme Court adopted a highly criticized rule of

20 law that the point of royalty valuation for gas produced in 21 Colorado would be at the viable commercial marketplace where 22 there are sufficient buyers and sellers even if that means 23 for the producer to bare alone the cost of long distance 24 transportation. Thus, Colorado producers need to prove up 25 the commercial marketplace, wherever it may be, in order to 214 1 2 1 establish a point of royalty valuation. 2 In other states which value gas at the well, 3 there still remains the critical need to establish market 4 value or market price under typical oil and gas leases at 5 locations near the production points rather than NYMEX and 6 Henry Hub. With the continued and steady guidance of the 7 Commission, hopefully, all or nearly all market participants 8 will report their transaction and cooperate with ensuring 9 that the spot price indexes are reliable for their useful 10 purposes and defensible against anyone who cares to second 11 guess their integrity. 12 On the points of liquidity, our marketing shop 13 notes that liquidity has increased substantially over the 14 past year and that, generally speaking, we find liquidity in 15 our market in our production areas. Our marketing shop is 16 primarily involved with marketing equity production and we 17 do find substantial liquidity in those areas. Occasionally, 18 we find soft liquidity. So, in that regard, we see 19 substantial improvement.

20 The other point I wanted to touch on was the hub 21 concept. We all note that the significant hubs, like Henry 22 Hub, of course, have tremendous take-away, great 23 transparency, a lot of services, et cetera. At another 24 different level, one could look at possible hub 25 opportunities and the increase of liquidity at the 215 1 2 1 convergence of unregulated assets and regulated assets. 2 Occasionally, you'll have a gathering system that 3 interconnects to multiple points with interstate pipelines. 4 Typically, a gathering company will stand aside 5 and say I won't touch any gas that's on the interstate line 6 because I don't want to be regulated. Perhaps, the 7 Commission could look at further development of light-handed 8 regulation to encourage that type of hub activity. Also, we 9 find that on storage-type projects that if there were 10 market-based rates allowed, generally, that storage projects 11 might be more forthcoming and a consequence of that might be 12 more hub activity and liquidity. Thank you very much. 13 COMMISSIONER HARVEY: Thank you. 14 Mr. Kaminski? 15 MR. KAMINSKI: Yes. Thanks. My name is Vince 16 Kaminski. I am the managing director at Sempra Energy 17 Trading, an energy trading marketing company located in 18 Stanford, Connecticut. 19 Let me start with the usual disclaimer that the

20 views expressed in this presentation represents the opinions 21 of the speaker and not necessarily those of Sempra Energy 22 Trading and that I would like to join most speakers who 23 participated in this technical conference and say that over 24 the last year we have seen a very substantial improvement in 25 the quality and the volume of price data available across 216 1 2 1 practically every energy market in the United States. And, 2 to a large extent, it is improvement that is due to the 3 police measures implemented by the FERC and the CFTC. And I 4 would like to join other commentors in extending recognition 5 to both institutions for efforts to improve price discovery 6 and price transparency in the U.S. energy markets. 7 We were asked to comment on liquidity and price 8 discovery in the context of trading hubs. And this is a 9 really unique trading arrangement typical of the energy 10 markets and a trading hub is really a combination of 11 physical and institutional assets that are critical of the 12 functioning of the energy industry in the United States. 13 When we are talking about the physical assets, we 14 are typically talking about intersection of transportation 15 and transmission lines, gathering systems, storage 16 facilities, switch yards for the electric lines and the 17 communications infrastructure. When we are talking about 18 the institutional assets behind the trading hubs, we are 19 talking about the institutional infrastructures supporting

20 both financial and physical transactions and for 21 facilitating handling of the physical commodity flows. We 22 are talking about trading corporations, the operations that 23 specialize in landing and parking energy commodities. We 24 are talking about the institutions helping -- transfer and 25 so on. 217 1 2 1 We are talking also about some other 2 institutional assets, which are critical to the operations 3 of the market. Specifically, we are talking about 4 conventions that underlies the standardized product 5 definitions, the ways prices are quoted, the way people 6 communicate in those markets and all those institutional 7 assets, all those conventions they help to reduce search and 8 transaction costs and improve market efficiencies. 9 So one of the questions we were asked is, in what 10 way FERC can help to improve efficiency of the existing 11 trading hubs and the obvious way, and this was referred to 12 by other speakers, is that the FERC can help in two 13 different ways. And one way is to help in development of 14 the necessary physical infrastructure that supports trading 15 hubs and, especially, storage and communication facilities. 16 And, also, FERC can help in a different way, 17 which is really critical to the energy market at this point 18 and this is primarily in the development of standardized 19 products, of standardized transactions which would help to

20 reduce transaction costs and it would also help to address 21 the credit issues. I'll be talking about it in a moment. 22 I am involved, particularly, every day in 23 validation of prices that are used by the trading 24 corporation for market-to-market all the positions that we 25 have in portfolio and, as of today, I don't have to worry 218 1 2 1 any longer about the monthly and daily price indices. I 2 think that the quality has improved greatly and I haven't 3 heard any complaints or any surprises about the levels of 4 daily and monthly indices. 5 What remains to be addressed is probably the 6 price discovery and the quality of data for the forward 7 market, especially, for longer -- and for certain locations 8 for which it is very difficult to get forward price 9 information for longer -- extending beyond the next season 10 or beyond the next year or two. Right now, the information 11 about forward prices comes in the form of assessments from 12 certain publishers and also in the form of bid offer spread 13 prices coming from the brokers. This information, sometimes 14 it's limited for certain locations, for certain physical 15 commodities and for longer --. I think the next critical 16 step for the energy industry is improving the quality of 17 information in the forward market. 18 And the final critical issues for market 19 liquidity is, of course, credit. And we know that credit is

20 a critical constraint in the energy markets in the United 21 States. And, to a large extent, this is due to the fact 22 that the industry is currently relying on very antiquated, 23 inefficient and expensive system defined around bilateral 24 credit arrangements, which require an efficient use of 25 working capital and risk capital. 219 1 2 1 And, of course, this can be addressed in the long 2 run by moving to the system of credit risk management based 3 on multilateral clearing and netting. This is, of course, 4 the best solution. But I have been for the last few years 5 that the industry can quickly move and embrace this solution 6 and this will help for a number of reasons. 7 First of all, we're operating in the industry 8 where physically delivery is critical. And, in many cases, 9 both counterparties want to rely on long-established 10 relationships and want to count that the counterparty has an 11 access to the critical, physical infrastructure to make 12 delivery. And many exchange-based effectively are in 13 equivalent of a blind date. You know, we find out with whom 14 we are transacting and who is making the delivery when it's 15 practically impossible to make the change. 16 Another problem is that many energy transactions 17 are understandardized and I have mentioned this before. But 18 it creates a huge problem when it comes to clearing and 19 netting. We can effectively clear only what we can value

20 without ambiguity and the problem is that many energy 21 transactions are not standardized and the industry has no 22 recognized agreed method of valuation for those transactions 23 and this means that in many cases we have a vicious circle. 24 We cannot clear transactions that we cannot value, 25 therefore, we have a low volume. We have high cost of 220 1 2 1 managing credit risks, therefore, we have low liquidity. 2 Low liquidity translates into limited price discovery. 3 Limited price discovery limits our ability to value the 4 transactions in an unambiguous way. And, of course, FERC 5 would help by pushing forward a number of standardized 6 descriptions in different physical markets. 7 And, finally, in many cases, switching to 8 multilateral clearing and netting will result in increased 9 credit cost for the following reasons. Right now, many 10 companies are managing credit risks by establishing credit 11 thresholds below which the margin -- doesn't apply. And, of 12 course, it's energy companies that use high thresholds of 13 exposure to determine the level at which margining begins 14 are trading immediate cash expense for a different type of 15 an expense related to the warehousing of credit risk. 16 And, of course, warehousing of a credit risk is 17 another cost. This cost doesn't have immediate cash 18 consequences, but it's still a cost. If there is a move to 19 margin -- based on multilateral netting and clearing, it's

20 like margin requirements would kick in at point zero and 21 many companies would lose the advantages of thresholds they 22 are currently using in credit risk management. 23 So these are my initial comments that I will be 24 very glad to elaborate on those points during this panel 25 session. 221 1 2 1 COMMISSIONER HARVEY: I'd like to start with a 2 question following up about credit. 3 For a very long period of time, credit didn't 4 appear to be sort of a major central issue. There was the 5 occasional bankruptcy and that would have ripples that we 6 kind of run through, but didn't seem to be as forefront as 7 it's become in the last couple of years with the failure of 8 companies with the credit downgrades. 9 Some of the more innovative ideas about 10 multilateral netting and some of the other purchases seem to 11 be slow in taking off right now. I guess I would sort of a 12 question for an assessment and I would like to get all of 13 your views on this. Are we sort of at a point where credit 14 has loomed large because of the financial condition, the 15 sort of localized condition. Are we at a point where the 16 cost of credit are being more appropriately recognized now 17 and beginning to work towards that? Were they always 18 appropriately recognized again and the downgrades kicked in? 19 I mean, where are we in the cycle of where credit affects

20 things. It occurs to me that the credit costs of these 21 transactions would have to be relatively significant and it 22 would be important that they be reflected some how in the 23 levels of liquidity and the interactions that are going on 24 out there. On the other hand, are we, again, at a sort of 25 local set of situations that its effect on liquidity or is 222 1 2 1 it really being recognized and are these things that are 2 finally being struggled with? 3 MR. MARTZ: I guess I would suggest that there 4 have been a couple of factors that impact upon credit. 5 One, I would suggest that parties are probably 6 taking a closer look at the counterparty's ability to pay. 7 Secondly, I would note that, if you've seen a run up in the 8 price over the last several years from the level of $2 maybe 9 two, three years ago, that also has a substantial impact on 10 the ability of the various parties out there to carry credit 11 and it even effects their ability to engage in transactions, 12 in part, for example, in the BP organization, you have what 13 they call "value at risk" and the higher the price the 14 smaller positions you can put on without running into your 15 bar limits. So it has several different effects in terms of 16 the price component and volatility, also, will effect the 17 ability of an entity's credit view of the other party. The 18 more volatile the market is the greater you're going to look 19 at that credit because you expect more movements in price,

20 which, in turn, affects the level of potential damages from 21 that counterparty. 22 COMMISSIONER HARVEY: But, I mean, is your sense 23 to maybe clarify my question, is your sense that people are 24 now in better command of those issues? That they simply 25 have to approach them differently than they used to because 223 1 2 1 of these changes in the marketplace? We here, antidotally, 2 things like I can't deal with the first five people that I 3 talk to because I don't have credit with them and, as it 4 turns out, on the one hand I could be concerned about that 5 because that means we might not be getting pricing that's 6 particularly efficient if there's big transaction costs that 7 are being thrown into the system. 8 On the other hand, if there are real transaction 9 costs in the system associated with credit, I want that 10 reflected in the price by the time it comes out. 11 MR. MARTZ: I think parties are looking more 12 carefully at the counterparties's ability to make payment 13 and cover their credit obligations. 14 COMMISSIONER HARVEY: Okay. 15 MR. EDMONDS: I would offer along those same 16 lines that some of the adoption by the industry of third 17 party clearing mitigation services, such as offered by two 18 of our members, one NYMEX and the other at Intercontinental 19 Exchange. The adoption of those products, what that meant

20 to free up or to better utilize the risk dollars a company 21 was willing to put at stake has been a very positive step 22 for the industry. I think that still is being refined on a 23 daily basis, but I would offer that any encouragement on 24 increasing the product set and I think it'll go back to some 25 things that Vince said about the standardization and the 224 1 2 1 products. Going back to something I said a little bit 2 earlier about the certainty of that standardization of 3 products would allow people to develop additional credit 4 mitigation services to those that already exist, allowing 5 more people to have access to the market. 6 In my earlier comments, I made the statement that 7 we're seeing the development of new players. Most of the 8 development of those new players are coming in because 9 they're trying to implement their strategy and trade ideas 10 around things that credit is no longer an really an issue 11 for them because they know exactly what credit is going to 12 cost them. They clear NYMEX. They clear Intercontinental 13 Exchange. It's a number. They understand how to calculate 14 that number and they price that into their equation. Is it 15 always reflective in the price, no. Certainly not, I don't 16 think, when you come to the physical-based transactions, 17 maybe more so in power than what you see in natural gas 18 because those are some of the products that may need a 19 little bit more refinement before they're then listed. But,

20 certainly, things like bases swaps and products of that 21 nature have been incredibly uptakes and that's when we've 22 seen the increase in volume in the marketplace and the 23 increase in the number of participants willing to step in 24 and add liquidity to the marketplace, even if some of them 25 were less liquid hubs. 225 1 2 1 MR. SAHAY: I guess credit has, particularly, for 2 the unregulated sector, changed the business model. So it's 3 been more a binary decision and it's far from the fact right 4 now that people are pricing credit in an efficient way. And 5 longer standardization will evolve and as Vince was talking 6 about, multilateral more efficient netting procedures will 7 evolve, but, by and large, I would say, as you said, 8 antidotally, that you just look at the good credit rating 9 and trade with them or not. 10 MR. JEPPERSON: After the sort of merchant 11 meltdown, credit was a huge issue for us. I mean, it was a 12 daily meeting talking about who can we sell gas to, you 13 know, and it was big deal, not so much now. 14 My perception is, is that it's not standardized. 15 It's getting there, but it's not very standardized at all 16 and we have to provide margin call in crediting, et cetera, 17 back and forth with each counterparty and negotiate that 18 individually, et cetera. It would be nice to get a 19 standardized methodology and, also, some kind of bilateral

20 netting that would be standard across the industry. 21 I'll add one other comment and that is, for 22 smaller companies, they have their credit revolvers under 23 which they might supply the capital for all that they do and 24 those bank transactions have covenants in there about how 25 much credit you can extend and what you can do and those are 226 1 2 1 also limits to what companies in this business can do. 2 MR. KAMINSKI: Well, credit is probably the 3 biggest challenge for the energy industry right now that 4 cuts across all the markets and then there are several 5 different issues. I can only signal because it would take 6 another technical conference like this one to talk 7 exclusively about the issue of credit. 8 You know, first of all, we in the energy industry 9 we don't have an efficient infrastructure for managing 10 energy risks in two ways. And the first problem is that we 11 have many different agreements that cover selectively 12 different markets and, in many cases, they overlap. In many 13 cases, they may be contradictory. And this is a condition 14 in which I call MAD. It's a multiple agreement disorder 15 which increases greatly the cost of managing credit risks. 16 Another problem is that, unlike in the financial 17 industry, in the energy industry, we don't have good ways to 18 price the credit risk. Practically, no company prices the 19 credit risk directly into the price of the financial and

20 physical transactions. In some cases, a company will take a 21 credit reserve, which will correspond to the estimated cost 22 of potential credit exposure. The critical problem with 23 credit right now is that the industry doesn't have good ways 24 to measure it, but everybody agrees that this is a major 25 problem and it affects the way we are doing business. 227 1 2 1 Whenever we contemplate entering into a long-term 2 transaction, we have always to think about the potential 3 liquidity drain related to the big move in the market 4 prices. And, given the high volatility of prices, and also, 5 given the secular shifts that may happen from time to time 6 in the energy markets, related to the supply shocks or 7 political shocks, the potential credit drain or working 8 capital drain related to any transaction may be very, very 9 big. 10 The one immediate consequence of this situation 11 is that in many cases the transactions are mush shorter than 12 they would otherwise be. In many cases, instead of looking 13 at five-year transaction after thinking about the potential 14 liquidity drain, the potential credit costs, we zero in on a 15 much shorter transaction. Let's say a transaction extending 16 18 months to two years. And, of course, this has 17 consequences towards risk management that is available to 18 different players in this business. It has consequences for 19 the ability to manage risk. It reduce the overall economy

20 efficiency of the United States economy and, given the 21 importance of the energy inputs to the industrial processes 22 and, also, the importance of energy as a consumption good, 23 you know, it has very, very big impact on the overall U.S. 24 economy. So the consequences are bigger than one might 25 think in the beginning. 228 1 2 1 MR. PERLMAN: Can I ask a couple of questions on 2 what all of you touched on, but, also, what Mr. Kaminski 3 just said? On this multiple agreement disorder, it's my 4 understanding that ISDA has created something quite a while 5 ago called an "energy bridge" and recently has put in a 6 power index, which effectively has everything under one 7 agreement. And then, there's also various master netting 8 agreements, such as the EI Master Netting Agreement, which 9 allows, for credit purposes, all physicals, gas and 10 electric, as well as derivatives to be netted together for 11 credit purposes and liquidation and closeouts. 12 So, I guess, one question I have is, do you guys 13 take issue with the efficacy of those documents and do you 14 not use them or is there some problem there? But, more 15 importantly, with respect to the standardization of 16 products, I guess I'm a little confused because I know that 17 ISDA has adopted the EEI electric product definitions for 18 its power NX and they seem to capture, at least from what I 19 can tell, the vast majority, if not sort of the totality, of

20 everything that can be standardized today. 21 So is there a need -- you've talked about a need 22 to standardize electricity and I guess gas products and the 23 gas products seem to have historically have been effectively 24 standardized for things that can be effectively traded as a 25 standard product. Is there some need to further 229 1 2 1 standardize, to identify products that the Commission should 2 some how get involved into to help the industry better 3 standardize its product definitions beyond what it's done 4 today and beyond what's been adopted by ISDA and the 5 electricity sector at least? 6 MR. EDMONDS: I'll offer this out. If you look 7 to trading activity for electricity in PJM or the New York 8 ISO, there's a considerable amount of certainty around the 9 standardization of what you're buying and selling. I can't 10 really say that that's the case when you talk about synergy, 11 for example, even though synergy is an extremely active hub. 12 But the tenure of the trades in synergy on an active basis 13 versus the tenure of the trades in PJM is short. 14 MR. PERLMAN: Is that because of regulatory risk 15 of the Commission and regulatory change into the market 16 structure as oppose to product definition? 17 MR. EDMONDS: My opinion would be that a possible 18 regulatory component that -- now that regulatory component, 19 if I look at PJM and what I'm buying and selling in PJM and

20 what I'm going to call an organized market versus synergy 21 and what we'll call an unorganized market, I may put myself 22 in a position where I don't -- it's a best effort or best 23 guess in synergy where it's probably more of a sight 24 available in the PJM and in the ISO market. 25 Obviously, the standard market design that people 230 1 2 1 have talked about, and I've sat through technical conference 2 here before in the past to think would have been a move in 3 the direction that people would have overcome that using 4 some of the components of that proposed effort. But we're 5 not there and everyone knows that story much better than I 6 do probably. 7 MR. PERLMAN: I'm going to try one more time. I 8 mean, it sounds like what you're talking about, I would be 9 interested in everybody's reaction to this, is that there's 10 better transparency and more structure in those markets that 11 allow, I think, probably for more effective and efficient 12 trading because the information is more available and the 13 administration by the independent system operators allows a 14 lot of data to come out. I don't know whether there's a 15 lot. There's an efficient trading hub and that sort of 16 thing. 17 In my mind, I see that different that an 18 standardized product and, if there something that needs to 19 be done with respect to the standardized products for either

20 type of market, because we're going to be living with both 21 that the Commission can help with, please tell us that there 22 is and tell us how we can go about helping to identify that 23 and work forward. 24 MR. EDMONDS: I don't know that I have the answer 25 to that one today. Anyone? 231 1 2 1 MR. KAMINSKI: One comment about the different 2 credit agreements. First of all, my experience is that 3 negotiating a credit agreement is typically a very long 4 process and requires going through a long process of 5 negotiations and the second problem is that my understanding 6 is that right now we cannot net across physical and 7 financial transactions and this a major limitation of the 8 existing netting agreement. This is my understanding and I 9 haven't heard anything to the contrary. 10 Now the problem of standardization comes up in 11 longer energy transactions, which typically have a lot of 12 embedded optionality and many different clauses that -- the 13 contract, depending on the market conditions. So, as a 14 result, we have typical energy contract, longer term energy 15 contract is a preferred over a very complicated interacting, 16 interrelated options and this is why negotiating a contract 17 and valuing a contract is a very challenging task. It would 18 help to develop a standard of longer term transactions that 19 could be used by the industry's leggo blocks, highly

20 standardized but which allows you to construct practically 21 any structure you want, a structure that can be easily 22 decomposed and taken apart. Piece could be transferred to 23 different counterparties. This would be extremely helpful. 24 I would make a comparison that the current 25 process of structuring a longer term energy transaction 232 1 2 1 reminds me of being an artist in the Middle Ages before the 2 arrival of the Industrial Age where everything is handmade, 3 everything is customized, every transaction is a snowflake. 4 It would help to have more standardized basic building 5 blocks of longer term transactions. It would allow to 6 accelerate and improve the process of developing longer term 7 transactions. And we have seen the same process, more or 8 less, in the financial markets. The financial markets have 9 come a long way towards standardization of most contracts. 10 MR. PERLMAN: Don't those building blocks exist 11 in, let's say, the organized markets as was mentioned where 12 you can have capacity, ancillary services, energy, operating 13 reserves, forward reserve markets, things like that. Is 14 that the type of thing that you're hoping the Commission 15 will attempt to put in place so that you can them and 16 approximate your structured transaction and then you think 17 that would help with the liquidity? 18 MR. KAMINSKI: Oh, absolutely. Exactly. 19 MR. PERLMAN: And that's because you could value

20 the transaction better? 21 MR. KAMINSKI: And we have also more price 22 discovery, longer term markets, longer -- 23 MR. PERLMAN: So this would make it much easier? 24 MR. KAMINSKI: I was going to say you're also 25 looking for longer -- for those kinds of things. The 233 1 2 1 biggest challenge is that sometimes we have to risk manage 2 or value the assets with very long life and, if we have the 3 financial markets, the financial instruments with much 4 shorter life, it creates a serious challenges when it comes 5 to valuation and risk management. 6 MR. MARTZ: In terms of those EEI credit and 7 master netting agreements, et al., I think one of the other 8 things is it takes a substantial amount of time to get any 9 of those in place because neither party is willing to start 10 and just accept the basic EEI Master Netting Agreement. We 11 all have numerous changes we make to them and it is an 12 extensive process. 13 The other thing to think about is, in the case of 14 some companies, PB being one of them, you're looking at 15 putting a master netting agreement in across several 16 companies. By way of example, we do our financial trading 17 in the publicly rated company. Certainly the physical 18 trading is done in other entities. That adds to complexity 19 in terms of getting those types of agreements in place.

20 MR. PERLMAN: Does that structure create problems 21 in getting the benefits of netting? Because, I think, as he 22 said before, it's difficult to net physicals against 23 derivatives under the bankruptcy law, but I think it's 24 probably -- and there's some ambiguity there, but I think it 25 very difficult to net in bankruptcy across entities. If you 234 1 2 1 have a single maybe. So your structure may cause some 2 issues there. 3 MR. MARTZ: We've been able to work and put in 4 place master netting agreements across the entities. It's 5 just a more timeconsuming process, so it takes longer for 6 you to get to that point and sometimes the other half of it 7 is the other party that you're trying to reach that 8 agreement with has to be interested in achieving the same 9 result. 10 MR. JEPPERSON: Our experience is the same. That 11 the credit annexed to the -- agreement usually comes with 12 customized provisions and about a page of them and then, 13 likewise, on master netting agreements and then you've got 14 the complication of affiliates who are transacting with that 15 same counterparty and you do try to do triangular netting 16 and different things and you get objections and it's a mess. 17 MR. EDMONDS: I would just add I was just asking 18 Martin to confirm my suspicion. I think one of the things 19 we see as an intermediary, what happens is, even if you get

20 one of these contracts and you get to the labor of love, I 21 guess it has to be in some respects, to get one done. Even 22 if Martin and, let's say, Vince at Sempra were to come to 23 terms on that contract and they got it all in place. -- 24 tweaks that when they go both to do a similar transaction 25 with Tom's company, for example. 235 1 2 1 Now you have two separate standards that aren't 2 necessarily fungible with one another, even though they may 3 be for the same product, same term and everything else. So, 4 even though you think you're buying Rocky Basis Swaps, for 5 example, I'll just use this as a very simple example, when 6 it times to these guys on the backside of the house to get 7 that done, the small tweaks in that may not allow them to 8 actually transfer those positions. So that would be an 9 additional constraint you'd have to come over until everyone 10 got on the same page in that effort. 11 MR. CHOO: So are you saying then, potentially, 12 there may be a role for FERC to help standardize across 13 these contracts? 14 MR. JEPPERSON: I don't think so. 15 (Laughter.) 16 MR. MARTZ: Do you really think you're up for 17 that one? 18 (Laughter.) 19 MR. CHOO: Just asking now. The lawyers can work

20 on that. 21 MR. PERLMAN: Frankly, that's why I asked because 22 it seems to me that these things are best done by the people 23 who have to with these transactions, live with one another, 24 ultimately, litigate it if there's a problem somewhere else 25 and we provide the basic platform and structure and 236 1 2 1 marketplace for you to do your transactions in. So, getting 2 back to the question of trading hubs, is there something 3 that we could do to better provide a structural platform to 4 put in place trading hubs that would allow you to reach 5 standardization, get more liquidity, focus on a location? 6 I know in the organized markets, the PJM West 7 example and the other types of trading hubs like that seem 8 to be good. But is there a need for more trading hubs in 9 the gas market, for example, in the Pacific Northwest or the 10 Rocky Mountains or the West, that somehow the FERC could 11 provide some benefit to, to provide a focus for a particular 12 location or some element to try and get that liquidity going 13 in an area maybe doesn't have a viable standardized basis 14 with Henry Hub? 15 MR. MARTZ: From a gas perspective, I think, and 16 from PB's perspective, the West has been one of the fairly 17 liquid areas. There is, in terms of the NYMEX cleared 18 market for basis swaps, there is a good market. Albeit, it 19 is not necessarily very liquid when you go out long periods

20 of time like the NYMEX futures market. Can you go to '06, 21 '07, 08? It's much more difficult to get things done as 22 opposed to the early months around the prompt month. 23 In terms of liquidity at some of the points for 24 physical gas in the West, our view is that it has been good 25 there. There is a good base for trading in some of those 237 1 2 1 points. We've experience less of a concern on the West 2 overall. In terms of the physical trading, we've seen 3 liquidity come back and it's actually been improving, 4 albeit, not at every one of the 70 points that the Platts 5 reports and the number that NGI reports. But, for the 6 majority of the points, I think it is good right now. 7 MR. EDMONDS: I would just offer of -- I mean, 8 the first question you all posed to this panel was define 9 adequate trading activity and I think what Martin's saying 10 is, on the short end of the curve, especially, out West, 11 even though we've seen a significant increase in the amount 12 of volume that trades out there across a number of different 13 products, you can't necessarily get that same type of 14 consistency further out on the curve. So do we have 15 adequate liquidity? Well, yeah, we do. 16 Do we have adequate liquidity on a ten-year 17 strip? Probably not what most people would call adequate. 18 So it comes a little bit more subjective on how you price 19 and value that particular transaction.

20 MR. MARTINEZ: I would like to ask a question. 21 On that first question, most of the data that we're talking 22 about one particular institutionalize asset, the one of 23 price reporting, transparency, mostly next day and bid-week 24 or next month. 25 Imagine for a moment that there were a lot more 238 1 2 1 transactions in those markets, the support market, and that 2 there were perfectly recorded and published and it were 3 clear. I'm asking about your intuition and your opinion. 4 How would that affect -- would that cascade in some way into 5 greater liquidity in longer term markets? How does these 6 contracts, all these different systems of contracts connect 7 so that maybe improving transparency in one of them in the 8 short term affect the longer term? 9 And, also, one concern we've had is about the 10 different levels of market activity in different parts of 11 the country. And, in the topic of hubs, do hubs compete 12 with each other or do they help develop? Is it like having 13 the hub reduces other locations to have very little activity 14 or do they actually promote it? Like, imagine that we were 15 just successful in what we were trying to do this morning, 16 what would you expect to see going forward, happening from 17 there in terms of populating other markets? 18 MR. MARTZ: I think one of the issues, and Vince 19 has hit on it in terms of developing the points further out

20 on the curve, comes back to credit-related issues, comes 21 back to people being willing to engage in transactions that 22 go out one or two or three years. Part of it is credit. 23 The other part of it may very well be volatility as well. 24 People may be less willing to take the risk that price is 25 going to move a lot farther out on the curve. You don't 239 1 2 1 have good indications of where the price may end up, so it 2 makes it much more difficult and you don't have any many 3 parties willing to transact out there. 4 MR. EDMONDS: If you look at the gas market, for 5 example, and you look at what's generally considered to be 6 the Gulf Coast region, pretty low volatility, historically. 7 Things sit out there, whether it's one year, two years, 8 three years, whatever. Going out, you pretty much know 9 where the market can be and it's going to be within a finite 10 range. So is there a lot of activity there? That's rubber 11 meet the road. People get that business done and then you 12 look at the development of the activity around Houston ship 13 channel, for example, and I would argue that over the last 14 three to five years you've seen a tremendous increase in the 15 value that that brings. 16 It has a much different volatility curve than, 17 let's say, Henry Hub. And, if you talk about the basis swap 18 markets and things of that nature and you see that 19 volatility extend out through the spread relationships to go

20 further out west and the ship channel versus the -- or ship 21 channel versus Panhandle, things like that. So, absolutely, 22 to answer one part of your question, Rafael, you absolutely 23 see one hub help build the other one. San Juan versus The 24 Rockies and things of that nature. You start to see these 25 spread relationships where people may not be as comfortable 240 1 2 1 with one versus one hub or the other independently, but when 2 the correlation -- with those two together, they're very 3 happy with and willing to engage in those transactions, 4 provided that they have the credit facility, as Martin said, 5 to do something that far out. 6 MR. KAMINSKI: Well, to answer your specific 7 question about the competition between different hubs, my 8 view is that there is a positive externality in development 9 of different hubs and the new hubs are not stealing business 10 from the existing hubs, but they improve overall efficiency 11 of the gas flows through the system. And they are, over the 12 last few years, several new hubs in the natural gas markets 13 have been created, given the development of the pipeline 14 infrastructure and the fact that new pipelines have been 15 created. Those pipelines intersect at certain points. Gas 16 has to be moved from one pipeline to another and the 17 existence of a hub facilities moving the gas and assist 18 them. So the overall system becomes more efficient. The 19 volume of trades increases, the volume flow is increased and

20 it has a positive externality for everybody. 21 One specific issue the industry has right now 22 when it comes to the long-term price discovery with LNG, 23 there are two questions related to LNG. One is the overall 24 impact of LNG on the level of gas prices in the United 25 States. But, for many players, another issue is more 241 1 2 1 important. This is what happens at this specific point, at 2 this specific location, as LNG is injected into those 3 locations. 4 It's obvious that the basis for the relationships 5 will change and, also, it's obvious that the gas flows in 6 the pipeline systems will change. The gas will be pushed 7 back to certain producing locations, given the arrival of 8 LNG gas. In some cases, seasonal differences will drop. 9 But, given the current state of the market, it's very 10 difficult to come up with answers to those questions and I 11 think it's, again, an interrelated question and an 12 interrelated problem. We cannot have good price discovery 13 without liquidity and we cannot have liquidity without price 14 discovery. But at the end of the day, some critical 15 infrastructure decisions depend about predictions of prices. 16 This is why the issues of liquidity goes well beyond just 17 trading and marketing of energy commodities. This is a 18 question also of the development of the existing 19 infrastructure.

20 MR. JEPPERSON: Let me share this comment on the 21 competition between hubs and the impact one to another. 22 About 10 years ago, we were involved with the western market 23 center, which is a header that was built out in Muddy Creek 24 on Kearn and other pipelines in that area. At the same 25 time, Opal was developing just upstream and it won out and 242 1 2 1 it's location was superior and parties collected at that 2 point to trade and they didn't trade and the Western Market 3 Center went down, basically, even though, you know, it was a 4 noble effort made. And the gas market is pretty efficient 5 and parties want low cost, great service and go to the right 6 places. 7 COMMISSIONER HARVEY: Let me follow-up. It might 8 have been Mr. Martz who used the term "moderate volatility." 9 From our perspective, not your perspective as companies, but 10 from our public policy perspective, how would we define good 11 levels of volatility? Maybe not too little, not to much, 12 but just right. How would we think about that? Somebody 13 can help me think about that. 14 (Laughter.) 15 MR. KAMINSKI: It depends if you ask me this 16 questions 10 years ago, I would like much more volatility. 17 (Laughter.) 18 MR. KAMINSKI: Well, to a large extent, you know 19 volatility is not necessarily bad because volatility is just

20 a manifestation of the fact that information is disseminated 21 through the system. So the fact that we have volatility 22 means that the system reacts to new information. So I don't 23 complain about volatility as such. I would worry if 24 volatility exceeded many times the changes in the underlying 25 fundamentals of the physical system and if we have the 243 1 2 1 simplification level, you know, this means that we either 2 have cases of market manipulation or we just have an 3 inefficient system that overacts to sometimes benign changes 4 in the underlying fundamentals. Where do you draw the line? 5 It depends but, if I were to answer this questions, I would 6 compare the volatility in prices with the volatility of the 7 fundamentals and there is some level where the two get out 8 of sync to much then I would start worrying about the 9 underlying system. 10 MR. EDMONDS: I just had one additional comment 11 on the volatility piece is without the right amount, and I'm 12 not going to offer an opinion on what the right amount would 13 be. It's going to be different. But certain amounts of 14 volatility bring players to marketplace and we're seeing 15 that right now. And, if that swings one way or another, you 16 may see exits of players and that's going to decrease 17 liquidity. 18 As Martin had said a little bit earlier, it also 19 increases your value of risk or your VAR. So it is good in

20 developing the market and it's what you want to see. It 21 can't become unpredictable volatility. I think Vince would 22 let me get away with that one because that is a negative 23 concept. But, moderate or predictable volatility with 24 people, going up or down, as it's reacting to news and 25 different events within the infrastructure is a positive 244 1 2 1 thing for market because it allows different opinions and 2 different people to participate. 3 MR. OVERDAHL: Let me just add a perspective from 4 the futures markets because this issue comes up in our 5 markets all the time. And the way I like to look at it is 6 kind of the way Vince was looking at it here. That there's 7 actually two types of volatility. There's a good volatility 8 and a bad volatility. I've heard it described. It's like 9 cholesterol. But I think the good volatility is what Vince 10 was referring to is with -- you know, it's reflecting 11 fundamental information coming to the market. That's what 12 markets are suppose to do and they should be volatile if 13 that's what's going on. But what you're worried about in a 14 policy realm is anything that is maybe imposing artificial 15 volatility and that might include things that are caused by 16 government action, I guess. So that's one of the ways we 17 look at it. 18 CHAIRMAN WOOD: I have, I hope, a somewhat 19 simpler question. One responsibility we have in market

20 oversight is to follow development in liquidity and we look 21 at volumes. We look at data spreads. We look at number of 22 transactions. Is there anything else you'd recommend that 23 we be looking at there? 24 MR. EDMONDS: I think you have to take into 25 consideration -- I know you're looking at prices, but the 245 1 2 1 relative impact that has on the credit profile as it affects 2 people's bar. Because if you're grading volume or what you 3 might consider to be adequate liquidity in a particular hub 4 based on a certain number of transactions when the price of 5 the commodity was $3 and, if the price of the commodity goes 6 to $6, you get exactly half the number of transactions. I 7 still think you still have adequate liquidity. It's not 8 going in a negative direction. It's just that it's credit 9 constrained at that point and so that correlation I would 10 encourage the Commission, from our perspective, to take 11 considerable look at. 12 CHAIRMAN WOOD: Thanks. 13 Any other questions? Ted? 14 MR.GERARDEN: I have a question for Mr. Sahay. 15 In the proposal that you have, you discuss document 16 standardization, some concepts of standardization. And, 17 also, one of the slides indicates a central hub for 18 collection and dispensing of price data. Are the 19 standardization concepts that you would include in here

20 depend on there being a central hub for collecting price 21 data or is there a value to standardization in an 22 environment that does not have central data collection? 23 MR. SAHAY: No. It's independent. So the 24 discussion on standardization is more along the continuum of 25 where the controls is in the maturity cycle and technology 246 1 2 1 or the way you're going to be engineering the information 2 deposits that's a separate piece. It's just an example of 3 what we did for one agency where we enabled that. Instead 4 of multiple reporting, it went through one central -- 5 MR. O'NEILL: Could I ask a question on the gas 6 trading -- I guess, the information we were given today, and 7 I've seen several times, the major traders are now major 8 oils -- BP, Carl, Conoco, Phillips, Chevon, Exxon. That 9 wasn't true four years ago. Would you speculate on why 10 that's so today, other than the fact that some of the people 11 at the top have disappeared. But, I mean, is it a change in 12 philosophy or just the fact that the guys at the top sort of 13 tumbled. 14 MR. MARTZ: I think it's a combination of 15 factors. One, it is, in part, the fact that folks at the 16 top did tumble. I think another part of it has to do with 17 credit as well. 18 MR. O'NEILL: Because you guys are -- 19 MR. MARTZ: Double A plus in the case of BP. I'm

20 not sure what Exxon or Shell or some of the other are, but 21 they're at least double A, double A plus. You have greater 22 capacity, greater credit capacity to engage in transactions. 23 MR. O'NEILL: So is that going to stick. I mean, 24 I don't want to ask you that question, but do we see that as 25 the way the future is looking and it's just the guys that 247 1 2 1 have a lot of the credit are going to be the big traders. 2 MR. JEPPERSON: We found that with the meltdown 3 that only parties that were creditworthy were players. 4 Everyone was running a bit panicked because you had all of 5 these positions with companies that were on the verge of 6 bankruptcy or went into bankruptcy and so maybe as an 7 overreaction you just, from that forward, you're going to do 8 business with those that are substantial in credit. 9 MR. O'NEILL: Vince, you're one of the guys in 10 the top five that isn't a major oil. Are you there because 11 you have good credit? 12 MR. KAMINSKI: Well, it's a combination of really 13 good credit and also my company was, historically, was 14 emphasizing physical business, a business evolving around 15 the fundamentals of the supply chain management. The second 16 reason why we have so many producers -- 17 MR. O'NEILL: That's your parent company. 18 MR. KAMINSKI: That's right. My parent company. 19 That's right. And the second reason why we have so many

20 producers dominating the charts, the top 20 charts, is that 21 it was really necessity -- a close vacuum and, in many 22 cases, the market -- distribution of, again, natural gas 23 and, to some extent, crude was very delegated to the 24 marketers and those marketers disappeared, like I say, 25 Dynergy marketing natural gas for, I guess, Chevron. When 248 1 2 1 marketers left the scene, there was no choice and the 2 producers had to step in and developing their own marketing 3 and trading corporations. And, when it extends across the 4 board, even some companies that were, historically, 5 extremely skeptical about energy trading -- energy trading 6 divisions now, which came as a surprise to the entire 7 industry. 8 MR. O'NEILL: You can get labor pretty cheap in 9 this business today. Right? 10 MR. KAMINSKI: That's right. Also, you know, 11 it's cheaper to get energy traders by the thousand. 12 (Laughter.) 13 MR. MARTINEZ: One question. So what of this 14 large companies with good credit and are able to undertake 15 large volume of tradings, what attracts them to become 16 marketmakers, you know, to create -- basically, build up a 17 trading point? What is the attraction? 18 MR. EDMONDS: I would have to offer that some of 19 that would be customer based. I mean, if you've got a

20 customer base that you picked up because of the decline of a 21 certain other service that's no longer available in a 22 particular geography and you build that up and you may not 23 have been a player at a particular point of delivery two 24 years ago, but now you're being forced to in order to 25 service the customer that is now a new customer for you. 249 1 2 1 Then, if you're there out of necessity in order to provide 2 the adequate amount of service for your customer base. 3 MR. MARTZ: We look at it in terms of providing a 4 value to a counterparty, which we get some compensation. 5 MR. JEPPERSON: We have a gathering company and 6 we're always looking for ways to provide services to the 7 larger producers and to give them points of market that they 8 might not otherwise have and to see if we can't find a way 9 for them to enhance their business. 10 CHAIRMAN WOOD: Any other questions? 11 Thank you very much and we'll open the floor to 12 anyone in the audience who would like to comment on matters 13 we've been dealing with today. 14 Mr. Lively? 15 COMMISSIONER HARVEY: I should note for anybody 16 interested in comments there are microphones at the corners 17 in here and we're happy to hear from you. 18 MR. LIVELY: My name is Mark Lively. I'm a 19 consulting engineering from Gaithersburg, Maryland.

20 I was listening to the comments about market 21 liquidity and the way I understand market liquidity is that 22 you want to be able to dump your long positions or to make 23 the shortages without penalty. And, to the extent that you 24 can do that that says market has the market has some 25 liquidity. 250 1 2 1 Well, I look at the market as somewhat of a 2 masonry wall. We have these bricks with cement around it. 3 Sometimes these bricks are maybe a 100 megawatt contract for 4 an hour or a 50,000 MCF contract for a day. Or maybe it's a 5 concrete block that sometimes gets put in there and then you 6 have to arrange how the bricks fit in with the concrete 7 block. Or maybe it's this great big stone wall over here 8 along First Street backing up Union Station and you have 9 huge blocks. But the question is, you've go to have this 10 masonry, this mortar, cement to fill up the seams and that 11 determines whether you've got some liquidity. But you have 12 to have a way to price that cement. And the way that I see 13 it is that we need to have ways to price those unscheduled 14 flows of the electricity or those gas imbalances, because if 15 we have that way to do that, then the brick wall, the 16 masonry wall stays up. Whereas, if you don't have a way to 17 have that cement, it will fall down. 18 I noticed that about a year and a half a go, 19 India decided that they were going to put in a way to price

20 what they call unscheduled interchange where they provided a 21 liquidity for the market and it's a one-step wall-raising 22 option. What happened to the Indian market after they put 23 in this pricing mechanism for UI? Objective measures of the 24 Indian electric system shows that they have improved their 25 operations by a factor of 5 to 10. There was suppose to be 251 1 2 1 the director of the -- or one of the regulators from India 2 was suppose to be here making a presentation to FERC about a 3 month ago, a guy name Banu Ushin, who had developed this 4 procedure when he was with Indian Power Grid. But it 5 provides a way to have that liquidity. 6 Now it allows people who are long to dump the 7 electricity. It allows the people that are short to buy 8 their shortages. Now, if you're long and you dump too much 9 electricity, you're going to depress the price in the Indian 10 market. If you're short, and you suck up too much 11 electricity, you're going to increase the price. So it's 12 not a thick market, but it is a market that provides this 13 cement to hold the blocks together. 14 In the United States, for natural gas, this 15 cement is somewhat provided by the pipelines. If someone 16 over delivers in an area, that's a gas imbalance and the gas 17 pipeline takes that as a gas imbalance and pays some price 18 for it. Similarly, if someone is short, the pipeline 19 delivers and it gets a price for what it delivers. That

20 provides some market liquidity to the United States. We 21 also have the issue for electricity how to pay for reactive 22 power. I noticed that the Massachusetts DTE included 23 pricing reactive power as part of their distributive 24 generation case last month. 25 Those are issues that I believe are necessary to 252 1 2 1 address the liquidity issue is to price that which is 2 unscheduled, whether it is unscheduled electricity, which 3 India has, at least, the beginnings of a solution to, 4 whether it is unscheduled gas imbalances, which the 5 pipelines have to buy and sell a little bit, but the 6 mechanisms that the gas pipeline use to buy and sell doesn't 7 have that facility that I mentioned earlier. That when 8 there's a shortage, that the price increases and when there 9 is too much gas, you should see the price decrease because 10 of that imbalance. Thank you. 11 COMMISSIONER HARVEY: Thank you very much. 12 Anyone else? 13 MR. KAMINSKI: May I comment on this? 14 COMMISSIONER HARVEY: Sure. 15 MR. KAMINSKI: Well, I have to say that this was 16 a very profound comment because it goes to the heart of the 17 problems we have in the energy market. As a matter of fact, 18 this is one of the biggest disasters I've seen in energy 19 trade because one company that was daily, four- and eight-

20 hour options on power and under the conditions that the 21 traded contracts were only for the 16 hour blocks. So this 22 means that the company had to sell the wings corresponding 23 to the areas outside those four- and eight-hour blocks of 24 power and there were very few takers. 25 But the biggest problem we have in the energy 253 1 2 1 market is that we are dealing with so-called incomplete 2 markets. So this means that we have risks in the system and 3 no corresponding through publicly-traded contracts that 4 allow to price and manage the risks related to those risks. 5 So I agree. The biggest challenge we have is that we have 6 some risk for which we have no corresponding prices. If 7 there is an easy solution to this problem, that would great. 8 But this is something that long-term police and energy 9 police should look into. 10 COMMISSIONER HARVEY: Great. Thank you. 11 Yes, sir? 12 MR. ELDUFF: My name is Doug Elduff. I'm in the 13 research of the New York Mercantile Exchange and on the 14 question of liquidity and, perhaps, the lack of in the back 15 of the curve, particularly, my comment is pointing to the 16 natural gas market. The relation to the lack of liquidity 17 and, perhaps, the profile of those traders that make up the 18 top tier of the market today and how that's changed from 19 three, four years ago. The profile of those who were at the

20 top of the market four or five years ago was such that they 21 had a significant amount of capital that was employed as 22 propriety trading. They were the risk managers and the ones 23 willing to take a measured risk for the sake of profit and I 24 think there is a great deal less risk capital at play in 25 today's markets, which is going to result in lower liquidity 254 1 2 1 in the back of the curve, even for end users who spoke 2 earlier and said they just can't find liquidity where they 3 once did. It was those types of players who put risk 4 capital at play who did provide that liquidity and they are 5 not there today for various reasons. Some because the 6 companies are no longer in business. Some because the 7 perception is that kind of risk capital being dispatched by 8 public companies is a bad thing and Wall Street has pushed 9 us in that direction. 10 So, if there are policies that can be fostered 11 that will improve liquidity, it's all about providing 12 certainty to participants who can come in and know that in a 13 relatively safe business environment they can dispatch this 14 capital into markets and provide liquidity further out the 15 curve. 16 MR. O'NEILL: Let me ask you a question. Did you 17 sort of imply that Wall Street overreacted to the recent 18 crisis? 19 MR. ELDUFF: I guess that's my opinion, not

20 necessarily of NYMEX. 21 MR. O'NEILL: Okay. 22 Do you folks have opinions on whether or not the 23 Street overreacted? 24 (No response.) 25 COMMISSIONER HARVEY: Apparently not. 255 1 2 1 Thank you very much. Anyone else? 2 Does anyone up here have any final comments or 3 thoughts to contribute? 4 Well, I thank everyone for their contribution. 5 It's been very, very helpful and will help us with moving 6 forward. Thank you. 7 (Whereupon, at 4:25 p.m., the conference was 8 concluded.) 9 10 11 12 13 14 15 16 17 18 19

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