The Current Situation For
Natural Gas Markets:
A Brief Overview
Presented to:
Louisiana State University
Center for Energy Studies
October 27, 2003
William F. Hederman
Director, Office of Market Oversight
and Investigations
FERC
Outline
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2
Introduction to FERC’s OMOI
Natural Gas Market Background
Current Situation
Gas Price Spike Study Highlights
Conclusion
Appendix: Brief History
After the chaos of California and Enron, the FERC
established a new office to perform expert market
monitoring.
Strategic Goal – Protect customers and other market participants
through vigilant and fair oversight of transitioning
energy markets.
Promote market understanding
--expert market oversight and investigatory capability
--follow trends
--develop market information and disseminate findings to
enhance Commission deliberations and public discussion
3
After the chaos of California and Enron, the FERC
established a new office to perform expert market
monitoring. (continued)
Assure
pro-competitive market structure/operations.
--assure conditions and infrastructure with objective benchmarks
--integrate FERC and other monitors’ work
--identify and remedy market structure/operations problems
--review market rules
--ensure M&A is pro-competitive.
Remedy behavior
--investigate market dysfunctions
--use ADR
--act swiftly on third-party complaints
4
Office of Market Oversight and Investigations (OMOI)
Director
Market
Scanning
Division of
Energy Market
Oversight
Division of
Management &
Communication
Deputy Director
Market
Oversight & Assessment
Division of
Financial
Market
Assessment
Division of
Integrated
Market
Assessment
Division of
Information
Development
Division of
Enforcement
Deputy Director
Investigations
& Enforcement
Hotline
Division of
Operational
Investigations
Division of
Technical
Investigations
5
Each component in the natural gas
marketplace has different characteristics.
Supply
Transmission
End Use
Physical Step
•Exploration &
Production
•Imports
(Pipe/LNG)
International,
Interstate &
Inatrastate
Pipelines
Private &
Municipal
LDCs
Residential
•Commercial
•Industrial
•Power
Generation
Industry Structure
Highly
Competitive
Generally
competitive in
large markets
Generally
regulated
franchises
Widely varying
sophistication
Potentially some
market power
6
Distribution
25
U.S. Natural Gas Consumption by Sector
Industrial
20
Commercial
Residential
Transportation
Electric Power
Tcf
15
10
5
0
1970
25,000
The gas market
has experience ups
and downs.
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
Net Imports
20,000
Tcf
15,000
10,000
Dry Gas Production
5,000
U.S. Natural Gas Supply (Production and Net Imports)
Trillion Cubic Feet per Year
0
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
1991
1994
1997
2000
$4.00
$3.50
Price ($/Mcf)
(Constant 1996 $$)
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
Natural Gas Wellhead Price
$0.00
1970
1973
1976
1979
1982
1985
1988
Natural gas market flexibility has
declined.
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8
Likely result: greater price volatility
Key factors
--production capability
--storage capacity and deliverability
--imports
--Canada
--LNG
--access to resources
--financial health of participants
--fuel switching
--trading liquidity
Gas Markets Move Toward Just-in-Time Delivery System for
Natural Gas (Gas production compared to capacity from 1995
through 2002).
Source: American Gas Association
9
Re-building confidence in markets: February Gas Price Spike Investigation
Physical Next Day (Gas Daily) & Futures Prompt Prices
February 3, 2003 - March 18, 2003
$30.0
$27.5
$25.0
Price ($ per MMBtu)
$22.5
$20.0
$17.5
$15.0
$12.5
$10.0
$7.5
$5.0
$2.5
2/
3/
20
0
2/ 3
4/
2/ 03
5/
2
2/ 003
6/
2
2/ 003
7/
2/ 200
10 3
/
2/ 200
11 3
/
2/ 200
12 3
/2
0
2/ 03
13
2/ /0
14 3
/
2/ 200
18 3
/
2/ 200
19 3
/
2/ 200
20 3
/
2/ 200
21 3
/
2/ 200
24 3
/2
0
2/ 03
25
2/ /0
26 3
/
2/ 200
27 3
/
2/ 200
28 3
/2
3/ 003
3/
2
3/ 003
4/
2
3/ 003
5/
20
0
3/ 3
6
3/ /03
7/
3/ 200
10 3
/
3/ 200
11 3
/2
0
3/ 03
12
/
3/ 03
13
/
3/ 03
14
/
3/ 03
17
/
3/ 03
18
/0
3
$0.0
Futures Settle - Prompt Month
Chicago - GD Next Day Phys
Henry Hub - GD Next Day Phys
Transco - Zone 6 NY - GD Next Day Phys
Waha - GD Next Day Phys
National storage levels
Bcf
3,500
Withdrawals of 154
Bcf
and 176
for the weeks ending Feb.
21 and Feb. 28, respectively
Volume (Bcf)
3,000
2,500
2,000
1,500
1,000
500
0
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Month
1998-2002 range
2002-03
2001-02
10
Source: AGA through 4/26/03; EIA from 5/3/02 through week ending 3/28/03.
Re-building confidence in markets: February
Gas Price Spike Investigation (continued)
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11
FERC OMOI/CFTC subpoenaed information from exchanges and brokerages
FERC OMOI/CFTC team examined more than 16,000 transactions, 130,000
bids/offers
Findings:
--relatively few active buyers and sellers at the time (liquidity problem)
--weather influence (cold front + sustained cold earlier + well freeze-offs)
--low storage levels
--tight production capacity
--markets related to one another effectively
--no evidence of manipulation from data, hotline, or trader interviews
Trade Press response: “the size, speed, and depth of the (FERC OMOI/CFTC
team) would have made an SEC ‘tiger team’ proud.” (The Desk, July 25, 2003,
page 5.)
The natural gas marketplace has
improved since last year.
12
2003 Winter Assessment
Deteriorating financial conditions
October 2004 Status
$60 billion of market cap gained by
major market participants in 2003
credit deratings have slowed
Managing credit exposure
More than $30 billion of stressed debt refinanced (only one company’s debt defaulted)
credit clearing initiatives are progressing
(reduced capital requirements)
Shaken confidence in price discovery
FERC policy statement (June 2003)
Revised trade press procedures
ICE agreements
A “work-in-progress”
Continuing potential for manipulation
Only isolated incidents recently
Conclusion
The natural gas marketplace is fundamentally
sound.
The current tightness of markets will challenge
industry, customers, and policymakers.
The natural gas and electricity markets are
growing ever-closer.
13
Appendix:
Evolution of the U.S.
Natural Gas Industry
14
U.S. Engineering History
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15
1700s – George Washington reportedly buys land
with a “burning stream” on it
1821 – First gas well discovered – Fredonia, NY
1859 – First gas pipeline, Titusville, PA
 2-inch, 5.5 mile pipe from well to village
Late 1800’s – gas used as source of light
Early 1900s – gas a byproduct of oil production used
regionally
 Poor quality of piping, inability to join sections of
pipe retard development of industry
U.S. Engineering History (continued)
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World War II – technology breakthrough
Advances in metallurgy, welding techniques and pipe
rolling
Pipeline construction boom begins
Lasts into the 1960s, creates much of the
natural gas pipeline network that exists today
Field & Gathering pipe
45,000 miles
Transmission pipe
253,900 miles
Distribution pipe
980,800 miles
TOTAL pipe
1,279,700 miles
16
U.S. Policy History
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17
Unregulated local monopolies
Monopoly regulation
Public Utility Holding Company Act of 1935
Natural Gas Act of 1938
Regulates natural gas transportation in interstate
commerce
Did not regulate local distribution of gas, production of gas,
gas gathering, intrastate pipe
Phillips Decision of 1954
Natural gas prices subject to regulation at wellhead
Price regulation now existed wellhead to burner tip
Attempt to legislate change fails due to scandal
U.S. Policy History (continued)
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1970’s – energy crisis
Oil Embargos
Gas Crisis 1976-77 – gas rationed

Unleashing of competitive forces
Natural Gas Policy Act of 1978
Partially deregulates price controls on gas
Maryland People’s Counsel of Maryland v. FERC
Sets stage for open access to pipeline system
Natural Gas Wellhead Decontrol Act of 1989
Removes all gas price control
FERC Order 436 of 1985/Order 500 of 1987
18
Removes all barriers to open access to pipeline system
U.S. Policy History (continued)
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19
1900s
FERC Order 636 (1992)
Unbundling of pipeline transportation
sources
Pipeline competition
Natural gas for power
Explicitly prohibited before by Fuel Use
Act of 1978