As U.S. natural gas prices hit record highs in the past week, federal investigations of trading manipulation have undermined confidence in the accuracy of published price surveys.
Evidence of past attempts to rig gas prices creates "serious doubts" about the accuracy of widely used gas-price reports and raises concerns about future manipulation, the staff of the Federal Energy Regulatory Commission said in a January report. "The natural gas industry cannot function without accurate, dependable and trustworthy wholesale price information," the commission staff said.
Federal prosecutors and regulators are expanding their investigation of attempts by energy-trading companies to manipulate prices. The inquiry is focused on companies that reported false prices to the surveys, which are benchmarks for natural gas sales to households and businesses nationwide.
In the past six months, six trading firms have admitted submitting false data to McGraw-Hill Cos.' Platts, publishers of the most widely used price indexes -- the gas industry's equivalent of the Dow Jones industrial average.
Although those abuses were in 2000 and 2001, when Enron Corp. and its rivals were battling to dominate a wide-open energy-trading market, gas pricing remains badly tarnished, FERC's staff and industry officials agree.
Doubts about the accuracy of basic gas prices come at a particularly vulnerable time. Gas prices have increased significantly in recent weeks because of heavy demand for heating fuels and fears associated with a war in Iraq. Investment funds, financial firms and speculators have rushed to trade natural gas on spot and futures markets, seeking to cash in on the volatility, analysts said.
"I don't have a lot of faith in the process of how prices are set," said Peter R. Huntsman, whose family-owned chemical company, Huntsman Corp. in Houston, is spending more than $200 million a year to buy natural gas, with the cost still rising.
"There has obviously been manipulation. We are seeing prices moving 5 to 10 percent a day," Huntsman said.
"The market today continues to be very subject to the potential of further manipulation," said Raymond Plank, founder and chairman of Apache Corp., an independent oil and gas exploration company in Houston.
Some energy traders said it is unlikely that gas prices are being manipulated now, when federal prosecutors and regulators are combing the industry for evidence of wrongdoing.
"I think some confidence has been restored recently, really," said John Kilduff, senior vice president of Fimat USA in New York, part of a global commodities and financial services firm. "The volatility is the result of stress on the system," he said, citing the threat of war in Iraq and the long spell of severe winter weather.
But a coalition of natural gas producers and customers says otherwise, and is demanding a fundamental change in the method of posting prices, based on the voluntary surveys by Platts and other companies.
Unless confidence in price reporting is reestablished, the vitality of the entire gas industry will remain undermined, Plank and others in the industry said.
Exploration companies will be leery of committing to risky drilling projects, and lenders will be hesitant to put up money for exploration if they don't trust the prices quoted on long-term gas supply contracts.
Some major gas companies have stopped reporting gas prices to Platts.
"You have some of the largest producers of natural gas declining to submit data at the present time," Plank said. "They are just saying, to hell with this."
In November, Platts said it could not issue its customary price data for 49 of 70 U.S. locations it surveys because it received too few trade reports. Instead, it offered price "assessments" reflecting judgments of its energy reporters and editors.
The volume of trading reports has since increased but is still below normal, Platts President Harry Sachinis said.
"We feel very comfortable with the quality of the data we're publishing every day," he said.
But Platts is under pressure from some people in the gas industry to fundamentally change its survey methods. A primary source of energy price surveys for 75 years, Platts relies on voluntary reports of trading activity, which are vetted by Platts's energy journalists.
Platts editors routinely throw out price reports from trading companies that look suspicious, Sachinis said.
A group of independent gas producers, utilities and other energy purchasers doesn't want to rely anymore on a privately published price survey. The Coalition for Energy Market Integrity and Transparency said FERC should closely regulate reported gas prices.
Another proposal has come from a group of 32 energy-trading company executives called the Committee of Chief Risk Officers. Their report, issued this week, says that much more detail about gas trades must be collected and included in price surveys, including the identities of both parties in a trade.
But that information must be kept confidential -- a requirement that would challenge Platts's fundamental methods. "This is incredibly sensitive information," said committee executive director Michael L. Smith.
A resolution of the debate is expected to come from the energy regulators at FERC. The higher gas prices rise, the greater the pressure for a decision, industry leaders said.