Natural Gas and Electricity Markets: Federal Government Actions  
to Improve Private Price Indices and Stakeholder Reaction	 
(15-DEC-05, GAO-06-275).					 
                                                                 
Since the 1970s, the natural gas and electricity industries have 
each undergone a shift toward greater competition, referred to as
restructuring. This restructuring has moved these industries from
regulated monopolies to markets in which competitors vie for	 
market share and wholesale prices are largely determined by	 
supply and demand. Amid this restructuring, private companies	 
have published information about these markets, including reports
of market prices in various locations--referred to as price	 
indices. These indices, whether for short-term "spot" or	 
long-term "forward" markets, are developed by surveying selected 
market participants who voluntarily supply price information.	 
Market participants rely on these price indices to help them make
informed decisions about trading these commodities and to	 
evaluate new investments. In recent years, confidence in price	 
indices has been shaken due to misreporting and other abuses.	 
During the energy crisis in the West in 2000-2001, several market
participants were found to have purposefully misreported prices  
in order to manipulate these indices for financial gain. In this 
context, GAO agreed to answer the following questions: (1) What  
federal regulatory and statutory efforts have been taken to	 
improve price indices in electricity and natural gas markets? (2)
Have federal efforts improved industry stakeholders' confidence  
in these price indices? 					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-275 					        
    ACCNO:   A43298						        
  TITLE:     Natural Gas and Electricity Markets: Federal Government  
Actions to Improve Private Price Indices and Stakeholder Reaction
     DATE:   12/15/2005 
  SUBJECT:   Commodity marketing				 
	     Competition					 
	     Electric energy					 
	     Federal regulations				 
	     Fraud						 
	     Malfeasance					 
	     Natural gas					 
	     Price indexes					 
	     Price regulation					 
	     Surveys						 
	     Transparency					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-06-275

     

     * Report to the Ranking Minority Member, Committee on Energy and Natural
       Resources, U.S. Senate
          * December 2005
     * NATURAL GAS AND ELECTRICITY MARKETS
          * Federal Government Actions to Improve Private Price Indices and
            Stakeholder Reaction
     * Contents
          * Results in Brief
          * Background
          * The Federal Government Has Undertaken Multiple Efforts to Improve
            Price Indices
          * Industry Stakeholders Are Reasonably Confident in Most Price
            Indices
          * Concluding Observations
          * Agency Comments
          * Scope and Methodology
     * Comments from the Federal Energy Regulatory Commission
     * GAO Contact and Staff Acknowledgments

Report to the Ranking Minority Member, Committee on Energy and Natural
Resources, U.S. Senate

December 2005

NATURAL GAS AND ELECTRICITY MARKETS

Federal Government Actions to Improve Private Price Indices and
Stakeholder Reaction

Contents

Figure

December 15, 2005Letter

The Honorable Jeff Bingaman Ranking Minority Member, Committee on
      Energy and Natural Resources United States Senate

Dear Senator Bingaman:

Since the late 1970s, the natural gas and electricity industries have each
undergone a shift toward greater competition, referred to as
restructuring. This restructuring has moved these industries from ones in
which local monopoly utilities provided services and regulators set prices
to ones in which competitors vie for market share, and wholesale prices
are largely determined by supply and demand. Amid this restructuring,
private companies have routinely published information about these
markets, including reports of market prices in various locations-referred
to as price indices-developed by surveying market participants who
voluntarily supply price information. In some cases, these price indices
refer to short-term markets-so called "spot" markets where the electricity
or natural gas is sold for delivery in the near term (e.g., the next hour
or the next day). In other cases, price indices refer to long-term
markets, such as "forward" and other markets-for the purposes of this
report, we refer to all of these as occurring in long-term markets-where
the delivery of natural gas or electricity is expected to occur in the
future (e.g., 30 days, 1 year, or longer). Utility companies and other
energy market participants rely on these price indices to help them make
informed decisions about buying and selling electricity and natural gas
and as a guide for potential new investments. Because price indices play
such a pivotal role in the market, it is vital that energy market
participants have confidence that these indices are robust, transparent,
reliable, and accurate. To help ensure that wholesale market prices are
fair and that the information in price indices is reliable and accurate,
the Federal Energy Regulatory Commission (FERC) has issued regulatory
rules supporting competition, routinely monitored markets for
anticompetitive behavior, and enforced and revised market rules as needed.

In recent years, confidence in price indices had been shaken due to
misreporting and other abuses. Most notably, during the energy crisis in
California and the West in 2000-2001, several market participants were
found to have purposefully misreported prices in order to manipulate these
indices for financial gain. As part of FERC's efforts to remedy price
manipulation and consumer overcharges that occurred during that
electricity crisis, it has ordered more than $4 billion in refunds. In
addition to concerns about misreporting, some market participants have
noted that the entities that publish price indices often failed to convey
information necessary for them to assess the quality and validity of the
indices, such as information about the volume of transactions represented
and the number of participants trading at various locations. As a result,
some stakeholders raised concerns about the federal government's ability
to adequately regulate and oversee natural gas and electricity markets and
the reliability and accuracy of prices reported in indices.

In this context, we agreed to answer the following questions: (1) What
federal regulatory and statutory efforts have been taken to improve price
indices in electricity and natural gas markets? (2) Have federal efforts
improved industry stakeholders' confidence in these price indices? To
answer these questions, we reviewed federal reports documenting efforts to
improve price transparency and examined literature on price transparency
in the natural gas and electricity markets. In addition, we interviewed
officials at FERC, representatives of relevant trade associations, and
experts. We examined FERC survey data and assessed its reliability by
reviewing existing information about the data, interviewing agency
officials knowledgeable about the data, and examining comments by the
entities surveyed. We conducted our work from June 2005 to November 2005
in accordance with generally accepted government auditing standards.

Results in Brief

Since 2003, the federal government has undertaken a series of regulatory
and statutory efforts to improve the availability and accuracy of price
information in price indices. First, FERC issued standards on voluntary
price reporting and rules of conduct in a July 2003 policy statement.
Second, FERC has also taken steps to improve its ability to monitor price
indices and enforce market rules by reviewing wholesale prices for
anomalies that could indicate market problems. In this regard, FERC has
also collaborated with other entities, such as the Commodities Futures
Trading Commission (CFTC) that oversees futures markets, some of which are
tied to long-term markets for electricity and natural gas and independent
market monitoring units that monitor organized electricity markets to
detect market manipulation. Third, the Energy Policy Act-enacted in August
2005-increases the amount and types of civil penalties that FERC may
impose on companies that engage in anticompetitive behavior, including
knowingly misreporting price information to index developers, and gives
FERC authority to collect additional transaction information if such
information is deemed necessary to ensure price transparency. Fourth, in
response to requirements in the Energy Policy Act, FERC and the CFTC
entered into a memorandum of understanding to share and coordinate
requests for information, which they say will allow FERC to more readily
identify and sanction market manipulation.

Many industry stakeholders report that they now have greater confidence in
most price indices, but some expressed concerns about price indices for
long-term electricity markets, such as price indices reported for forward
energy trades. For example, in a recent survey, FERC found that two-thirds
of respondents reported their confidence in price indices, on a scale of 1
to 10, as a 7 or greater (10 being most confident). Further, FERC reported
that since 2002, the quality of information has improved because more
companies are reporting transaction data to publishers of price indices
and because major price index publishers are providing greater information
about the number of transactions and volume of electricity and natural gas
bought or sold at specific trading locations. Our own investigations
corroborated what FERC found in its survey. Specifically, in our meetings
with natural gas and electricity industry stakeholders, they reported
that, in general, they are reasonably confident in the prices now reported
by trade publications. They also noted that the quality of overall
information has improved, which has increased their confidence that these
indices can be used to evaluate potential new investments. While
stakeholders expressed general satisfaction with most price indices, some
reported concerns about price indices for long-term electricity markets.
Specifically, they now recognize that some of these long-term markets
witness fewer transactions and, as a result, are less developed and less
reliable than their short-term counterparts. Consistent with this,
stakeholders told us that it is sometimes difficult to find a willing
trading partner in some long-term electricity markets. In the absence of
reliable information on long-term electricity prices, electricity market
participants noted that they instead trade in more developed long-term
natural gas markets as a substitute. These stakeholders explained that,
because natural gas is used extensively to generate electricity, natural
gas and electricity prices often move together and, therefore, natural gas
forward prices can substitute, to some extent, for electricity futures
prices. However, they also said that the availability and use of these
long-term natural gas markets only partly mitigate the lack of robust
long-term electricity markets, because electricity and natural gas prices
can and do sometimes move independently.

Background

The natural gas and electricity industries perform three primary functions
in delivering energy to consumers: (1) producing the basic energy
commodity, (2) transporting the commodity through pipelines or over power
lines, and (3) distributing the commodity to the final consumer.
Historically, many local utilities in the electricity sector built their
own systems of power plants and electricity transmission and distribution
lines to serve the needs of all consumers in their local areas. Similarly,
natural gas companies built networks of pipelines to deliver natural gas
from areas where it was produced to the markets where local distribution
companies served all local customers. These local monopolies were overseen
by regulators, who restricted the entry of new companies and also approved
investments, approved prices paid by customers, and determined profits of
these utilities. However, due to rising electricity prices and
technological, economic, and policy developments beginning in the 1970s,
the electricity and natural gas industries have restructured from a
regulated environment to one that places greater reliance on competition
to determine entry, investment, prices, and profits. The passage of the
Natural Gas Policy Act of 1978, the Natural Gas Wellhead Decontrol Act of
1989, and subsequent FERC orders in 1985 and 1992 opened access to
pipelines and required pipeline companies to completely separate
transportation, storage, and sales services, all of which facilitated the
shift of natural gas to more competitive markets. Similarly, the 1978
passage of the Public Utility Regulatory Policies Act of 1978 and the 1992
passage of the Energy Policy Act facilitated restructuring in the
electricity industry. FERC built upon these efforts through major
regulatory actions in 1996 and 1999 that required utilities under its
jurisdiction to, among other things, provide nonutility companies that
generated electricity with access to the utility's interstate transmission
lines and encouraged utilities to join in the creation of independent
organizations to operate the transmission system, such as Independent
System Operators (ISO) and Regional Transmission Organizations (RTO).

Under federal statutes, FERC is the principal federal agency that
regulates the natural gas and electricity industries to ensure that
wholesale electricity and natural gas prices are fair.1 FERC is
responsible for developing and maintaining the regulatory framework that
approves or otherwise influences the utilities' terms, conditions, and
rates for the sale or resale and transmission of natural gas and
electricity in interstate commerce. Historically, to ensure that the
prices these utilities charged were just and reasonable, FERC regulated
rates by basing the prices on the utilities' costs to provide service plus
a fair return on investment. Now, FERC seeks to ensure that wholesale
natural gas and electricity prices are just and reasonable by promoting
competitive markets, issuing market related rules that encourage efficient
competition, and enforcing and correcting market rules as needed.

In the newly restructured markets, many energy market participants rely on
price information obtained from various sources, including price indices
published in trade press because some companies can be reluctant to freely
provide data on purchases and sales. Private companies develop these price
indices by collecting information about market prices from market
participants in a variety of ways, including phone calls to individuals
within energy trading companies. Market participants use these indices to,
among other things, help them make informed decisions about buying and
selling natural gas and electricity. For example, energy market
participants use price indices as a benchmark in reviewing the prudence of
gas and electricity purchases and often reference price indices in the
contracts they develop for gas and electricity purchases. As part of its
market oversight efforts, FERC also monitors these price indices to detect
anticompetitive behavior.

Other federal agencies have roles affecting the electricity and natural
gas markets. The Commodity Futures Trading Commission (CFTC) oversees
markets and transactions related to the sale of commodity and financial
futures and options, while the Federal Trade Commission (FTC) and
Department of Justice police deceptive selling practices. In addition to
these federal agencies, states also oversee aspects of natural gas and
electricity delivery, often through public utility commissions.

The Federal Government Has Undertaken Multiple Efforts to Improve Price
Indices

Since 2003, FERC has undertaken a series of efforts to improve the
availability and accuracy of price information, including specifically
addressing price indices. In 2000 and 2001 during the energy crisis in the
West, some market participants knowingly misreported data to index
providers in order to influence these indices for financial gain.
Following that, FERC convened a series of conferences and workshops that
included regulators, energy market participants, price index publishers,
and industry experts. One of these events included participation by the
CFTC and another included participation by the National Association of
Regulatory Utility Commissioners (NARUC).2 As a result of these efforts,
FERC staff developed a better understanding of market participants'
desired characteristics of the price indices and behavior of other market
participants. These conferences and workshops also revealed some practical
short- and long-term solutions to problems such as how market price
indices are developed and why reduced energy trading activity was
occurring.

Using the information that it developed through its conferences and
workshops, FERC developed new standards and rules of conduct for both
market participants submitting trade data and for price index publishers,
to help ensure that price indices were more accurate and reliable and to
strengthen market participants' confidence in price indices. FERC outlined
the standards that energy market participants and index developers should
follow in a 2003 policy statement. According to FERC, these standards were
designed to encourage standardization in the voluntary reporting of price
and other market information, among other things, and to assure companies
that they will not be subject to administrative penalties for inadvertent
errors in reporting.3 These standards also encourage energy market
participants to report not only prices but also the volume of the traded
commodity and the date and time of the transaction, and encourage the
entities that publish price indices (e.g., Platts, Natural Gas
Intelligence, and Dow Jones) to also publish this relevant market
information. In addition, FERC standards encourage index publishers to
verify the price data obtained from companies that provide price data, to
indicate when a published price is an estimate made by the publisher
rather than data reflecting only the results of actual trades, and to
monitor the data to identify attempts to manipulate energy price indices.
Finally, FERC standards encourage price index publishers to explain to
users how the index is developed and include the formulas used to
calculate the index.

With regard to rules of conduct, FERC issued two orders in November 2003
designed to establish clear guidelines for sellers of wholesale
electricity and natural gas subject to its jurisdiction.4 These guidelines
prohibit actions that do not have a legitimate business purpose and are
capable of manipulating prices. For example, they prohibit submitting
false or misleading information to FERC or price index publishers.

FERC has also taken steps to improve its ability to monitor price indices
and enforce related market rules. Recently, we reported that FERC had made
significant efforts to revise its oversight approach to better align with
its new role in overseeing restructured markets. In particular, we have
reported that through the establishment of its Office of Market Oversight
and Investigations in 2002, FERC had taken a more proactive approach to
monitoring by reviewing large amounts of data, including wholesale prices,
for anomalies that could lead to potential market problems.5 In addition,
FERC, which oversees the operators of electricity grids, including ISOs
and RTOs, has worked with these organizations' market monitoring
units-many of which collect substantial amounts of information on prices
and other data to determine, among other things, whether prices are the
result of fair competition or appear to be a result of market
manipulation.

Finally, the passage of the 2005 Energy Policy Act included FERC's
proposed statutory changes to address misconduct of market participants by
increasing civil penalties imposed on companies that participate in
anticompetitive behavior or manipulate the market. These changes increase
FERC's ability to levy civil penalties under existing laws, raising
potential fines to as much as $1 million per day per violation for as long
as the violation continues.6 A FERC official said that increasing civil
penalties would allow it to more effectively deter market manipulation and
misconduct that is damaging to competitive markets. Moreover, FERC
officials said that it would lead to greater certainty for market
participants, thereby increasing participation in markets. The Energy
Policy Act also gives FERC authority to collect transaction information if
necessary to ensure price transparency. A FERC official said that this
authority would give FERC additional tools if the current voluntary system
of reporting prices to price index publishers proves inadequate. In
addition, in response to requirements in the Energy Policy Act, FERC and
the CFTC entered into a memorandum of understanding to share and
coordinate requests for information, which they say will allow FERC to
more readily identify and sanction market manipulation.

Industry Stakeholders Are Reasonably Confident in Most Price Indices

Many industry stakeholders report that they are now reasonably confident
in short-term price indices, although some concerns about the transparency
of long-term electricity markets remain. As part of its effort to assess
its efforts to improve price indices, FERC surveyed industry participants
in March 2004, asking them to rate their confidence in price indices-with
1 representing no confidence and 10 representing total confidence that
price indices accurately represent market pricing. Confidence in price
indices ranged from an average of 7.5 for gas utilities to 6.7 for
marketers, with nearly half reporting a confidence of 8 or greater.7 (See
fig. 1.) In addition, in 2004, FERC reported that price index publishers
have submitted information showing that the volume and number of
transactions have increased significantly since 2002 and is influenced by
at least two factors. First, companies that had been reporting
transactions began reporting more transactions to publishers of price
indices. Second, companies that had not been reporting had begun reporting
transactions to publishers of price indices. Furthermore, many of the
companies reporting in 2004 are among the industry's larger and more
active participants.

Figure 1: Customer Satisfaction with Price Indices in 2004

Consistent with what FERC found, industry trade and research organizations
and others that we interviewed reported to us that their members have few
significant concerns about the short-term, also called spot, price indices
or long-term natural gas indices. They report that, overall, FERC's
efforts to improve the transparency of spot price indices achieve
sufficient oversight without being heavy-handed. In addition, industry
participants told us that the quality of data being provided to publishers
of price indices has improved since 2002. For example, according to a
major price index publisher, the reporting of price information has
significantly improved in the last 2 years, and, further, the quality of
analysis and reliability of the prices that they report has improved.
Finally, publishers are providing more information about the market, such
as the number of transactions and the amounts of energy bought and sold at
specific trading locations. For example, a major publisher reported to us
that, as of August 2004, it includes volume and transaction data for each
pricing point in the spot market.

Despite their general satisfaction with most price indices, some
stakeholders reported concerns about price indices for long-term
electricity markets. In particular, representatives of one trade
organization told us that while data regarding spot prices and long-term
natural gas prices have improved, they still have concerns about
electricity prices involving long-term purchase arrangements and similar
long-term contracts (e.g., forward and futures markets, where long-term
contracts for electricity and related financial instruments are bought and
sold).8 Stakeholders are now able to see that these markets witness fewer
transactions and, as a result, are less developed than others. One factor
affecting price transparency in these long-term markets is that the use of
these markets collapsed in 2002 over concerns that prices were
manipulated. This collapse, in turn, has resulted in fewer market
participants and a market that is less developed, making it difficult for
those still wanting to participate in these markets to find a willing
trading partner. In addition, two stakeholders told us that there are not
many options for obtaining data regarding longer term energy market
transactions. Complicating this concern, FERC does not have jurisdiction
for overseeing futures markets and has only a limited direct role in
long-term markets. As a result, FERC does not formally collect extensive
data on futures or long-term markets.9 As a result, one energy market
participant reported that it relies on limited data when developing or
valuing long-term electricity contracts. In the absence of a mature and
reliable long-term electricity market and information about prices, market
participants noted that for now they rely on long-term natural gas markets
and indices, which are more developed. These market participants told us
that because natural gas is used extensively to generate electricity, the
prices often change together. They also said that the availability and use
of these natural gas markets only partly mitigates the lack of robust
electricity markets, because electricity and natural gas prices can, and
do, sometimes move independently.

Concluding Observations

The move away from regulators setting prices and toward markets where
prices are increasingly a function of competition has raised the
importance of price indices as a mechanism to communicate information to
the market. In recent years, market participants have used these indices
in structuring their transactions and regulators have used them to judge
how the market is performing. As a result, it is important that they
accurately and reliably reflect actual prices.

The federal government has taken a number of steps to encourage improved
availability and accuracy of price indices, which has increased industry
confidence in price and other market information provided in spot price
indices. Although federal efforts appear to have had a positive impact on
short-term (spot) price indices, some concerns remain about price indices
for long-term electricity markets. It does not appear that there is an
easy way to improve reporting on these long-term electricity markets until
the markets themselves mature. Because of the importance of price indices,
it will be important for FERC, Congress, and others to remain vigilant in
their monitoring of existing price indices and attentive for alternatives
to address the remaining issues in longer term markets.

Agency Comments

We provided a copy of our draft report to FERC for comment. FERC provided
written comments, which are presented in appendix I. In its comments, FERC
generally agreed with our findings and conclusions. In addition, FERC
provided a variety of technical and other comments, which we incorporated
as appropriate.

Scope and Methodology

To obtain information about efforts FERC has taken to improve natural gas
and electricity price indices, we reviewed reports and other documents
describing federal efforts to improve price transparency and examined
literature on price transparency in the natural gas and electricity
markets. In addition, we interviewed government officials at FERC,
representatives of trade associations, and industry and academic experts
in the field. We assessed the reliability of FERC confidence survey data
by reviewing the survey instrument and methodology used to tabulate
results, interviewing relevant agency officials knowledgeable about the
data to understand any limitations of the data, and corroborating results
by interviewing some of the entities surveyed.

We conducted our work from June 2005 to November 2005 in accordance with
generally accepted government auditing standards.

We are sending copies of this report to the Chairman of FERC as well as
other appropriate congressional committees. We also will make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at h  ttp://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-3841 or [email protected] . Contact points for our Office of
Congressional Relations and Office of Public Affairs may be found on the
last page of this report. GAO staff who contributed to this report are
listed in appendix II.

Sincerely yours,

Jim Wells Director, Natural Resources     and Environment

Comments from the Federal Energy Regulatory Commission Appendix I

GAO Contact and Staff Acknowledgments Appendix II

Jim Wells (202) 512-3841

In addition to the individual named above, Jon Ludwigson, Kristen Massey,
Frank Rusco, Barbara Timmerman, Alison O'Neill, Chris Pacheco, and Kim
Wheeler-Raheb made key contributions to this report.

(360590)

www.gao.gov/cgi-bin/getrpt? GAO-06-275.

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact Jim Wells at (202) 512-3841 or
[email protected].

Highlights of GAO-06- 275, a report to the Ranking Minority Member,
Committee on Energy and Natural Resources, U.S. Senate

December 2005

NATURAL GAS AND ELECTRICITY MARKETS

Federal Government Actions to Improve Private Price Indices and
Stakeholder Reaction

Since the 1970s, the natural gas and electricity industries have each
undergone a shift toward greater competition, referred to as
restructuring. This restructuring has moved these industries from
regulated monopolies to markets in which competitors vie for market share
and wholesale prices are largely determined by supply and demand. Amid
this restructuring, private companies have published information about
these markets, including reports of market prices in various
locations-referred to as price indices. These indices, whether for
short-term "spot" or long-term "forward" markets, are developed by
surveying selected market participants who voluntarily supply price
information. Market participants rely on these price indices to help them
make informed decisions about trading these commodities and to evaluate
new investments.

In recent years, confidence in price indices has been shaken due to
misreporting and other abuses. During the energy crisis in the West in
2000-2001, several market participants were found to have purposefully
misreported prices in order to manipulate these indices for financial
gain.

In this context, GAO agreed to answer the following questions: (1) What
federal regulatory and statutory efforts have been taken to improve price
indices in electricity and natural gas markets? (2) Have federal efforts
improved industry stakeholders' confidence in these price indices?

Since 2003, the federal government has undertaken a series of regulatory
and statutory efforts to improve the availability and accuracy of price
information in price indices. First, FERC issued standards on voluntary
price reporting and rules of conduct in a July 2003 policy statement.
Second, FERC has taken steps to improve its ability to monitor price
indices and enforce market rules by (1) reviewing wholesale prices for
anomalies that could indicate market problems and (2) collaborating with
other entities, such as the Commodity Futures Trading Commission (CFTC),
and independent market monitoring units that monitor organized electricity
markets to detect market manipulation. Third, the Energy Policy Act-
enacted in August 2005-increases the amount and types of civil penalties
that FERC may impose on companies that participate in anticompetitive
behavior, including knowingly misreporting price information to index
developers and gives FERC authority to collect additional transaction
information if such information is necessary to ensure price transparency.
Fourth, FERC and the CFTC entered into a memorandum of understanding to
share and coordinate requests for information, which they say will allow
FERC to more readily identify and sanction market manipulation.

Many industry stakeholders reported that they now have greater confidence
in most price indices, but some expressed concern about price indices for
long-term electricity markets. FERC reported that stakeholders are
generally satisfied with current price indices and that the quality of
information has improved. For example, in a recent survey FERC found that
two-thirds of respondents reported their confidence in price indices, on a
scale of 1 to 10 (10 being most confident), as a 7 or greater. Further,
FERC reported that since 2002 the quality of information has improved
because (1) more companies are reporting data to publishers and (2) major
publishers are providing more information about the number of transactions
and volume of electricity and natural gas trades. GAO's own investigations
corroborated what FERC found in its survey. Specifically, natural gas and
electricity industry stakeholders reported that, in general, they are
reasonably confident in the short-term prices now reported by trade
publications and the improved quality of overall information. While
stakeholders expressed general satisfaction with most price indices, some
reported concerns about price indices in long-term electricity markets.
Furthermore, stakeholders are now able to see that some of these markets
witness fewer transactions and, as a result, are less developed than
others. In the absence of a reliable long-term electricity market and
information about prices, market participants noted that they rely on
long-term natural gas markets and indices that are more developed.
Stakeholders told GAO that, because natural gas is widely used to generate
electricity, their prices often move together and, therefore, natural gas
forward prices can substitute, to some extent, for electricity futures
prices. They also said that the use of these natural gas markets only
partly mitigates the lack of robust long-term electricity markets, because
electricity and natural gas prices sometime move independently.
*** End of document. ***