UNITED STATES FEDERAL ENERGY REGULATORY COMMISSION

‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑x

PRICE DISCOVERY IN NATURAL GAS : Docket Nos.

AND ELECTIRC MARKETS : PL03‑3‑005

:

NATURAL GAS PRICE FORMATION : AD03‑7‑005

:

AQUILA, INC. : ER03‑1271‑000

:

B‑R PIPELINE COMPANY : CP01‑418‑000

:

COLORADO INTERSTTE GAS COMPANY : CP03‑7‑001

:

COLORADO INTERSTTE GAS COMPANY, : CP03‑301‑000

ET AL. :

:

KINDER MORGAN INTERSTATE GAS : RP03‑245‑000

TRANSMISSION LLC :

:

NATURAL GAS PIPELINE COMPANY OF : RP99‑176‑089

AMERICA : RP99‑176‑094

:

NORTH BAJA PIPELINE LLC : RP02‑363‑002

:

NORTHERN NATURAL GAS COMPANY : RP03‑398‑000

:

NORTHERN NATURAL GAS COMPANY : RP03‑533‑000

:

PG&E GAS TRANSMISSION, : RP03‑70‑002

NORTHWEST CORPORATION : RP03‑70‑003

:

PORTLAND GENERAL ELECTRIC : CP01‑421‑000

COMPANY : CP01‑421‑001

:

TRANSCONTINENTAL GAS PIPE LINE : RP03‑540‑000

CORPORATION :

:

PACIFICORP : ER04‑439‑001

‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑ ‑x

Commission\'s Meeting Room, 2C

Federal Energy Regulatory Commission

888 First Street, N.E.

Washington, D.C.

The above‑entitled matter came on for

conference, pursuant to notice at 9:00 a.m.

BEFORE:

BILL HEDERMAN, OMOI

ATTENDEES:

Bill Hederman, OMOI

Steve Harvey, OMOI

Rafael Martinez, OMOI

Dave Perlman, OGC

Jim Overdahl, CFTC

Mike Stzelecki, OMTR

Mike Gorham CFTC

Ted Gerarden, OMOI

Lee‑Ken Choo, OMOI

Mike McLaughlin, OMTR

Dick O\'Neill, OMTR

COMMISSIONERS:

Sharon Brown Hreska

Joseph T. Kelliher

Nora Mead Brownell

Pat Wood, III, Chairman

Suedeen G. Kelly

Ric Campbell

Panelists as listed in the agenda

AGENDA

WELCOME AND OPENING REMARKS 9:00‑9:30 a.m.

William Hederman, Director Office of Market Oversight

& Investigations

Stephen Harvey, Deputy Director, Market Oversight

and Assessment

Michael Gorham, Director, Division of Market

Oversight, Commodity Futures Trading Commission

Panel 1 ‑‑ Reaction to Staff Report and Recommendations for

Indices Used in population or Utility Tariffs

9:30‑10:30 a.m.

PANELISTS:

Bruce Henning, Regulatory and Market Analysis, Energy

Environmental Analysis, Inc. (American Gas Association)

Eugene V. Rozgony, Vice President and Chief Risk Officer,

AGL Resources

Donald Santa, President, Interstate Natural Gas Association

of America

APPEARANCES CONTINUED:

Alexander Strawn, Proctor & Gamble Company and Chairman of

the Process Gas Consumers

James Allison, Regional Risk Manager, ConocoPhillips

ISSUES:

Should the Commission adopt Staff\'s recommendation that any

index used in a tariff provide volume and number of

transactions for each reported price? Should other data be

required?

Are Staff\'s recommended volumes (25,000 MMBtu/day or 4000

MWh/day ) or transactions (five for daily, eight for weekly,

ten for monthly indices) sufficient to indicate adequate

liquidity?

Should the Commission require all pipelines and utilities to

amend their tariffs by a date certain if indices currently

used in tariffs do not meet adopted criteria?

What conclusions can be drawn for the responses to the

Commission\'s surveys on price reporting?

ISSUES CONTINUED:

How does trading on electronic platforms and price data

collected from electronic trading, clearing, and settlement

relate to index development and use of indices in

jurisdictional tariffs?

BREAK 10:30 a.m.‑10:40 a.m.

Panel 2 ‑‑ Price Reporting, Confidence in Indices and

Options for future Commission Action

10:40 a.m.‑12:15 p.m.

Scott Nauman, Manager, American Gas Marketing, ExxonMobil

Gas &Power Marketing Company (Natural Gas Supply

Association)

Nathan L. Wilson, Vice President, Conectiv Energy (Electric

Power Supply Association)

Michael Novak, Assistant General Manager, Federal Regulatory

Affairs, National Fuel Gas Distribution Corporation

(American Gas Association)

Alonzo Weaver, Vice President Operations, Memphis Light Gas

& Water (American Public Gas Association)

APPEARANCES CONTINUED:

Jeff Walker, Senior Vice President and Chief Risk Officer,

ACES Power Marketing (National Rural Electric Cooperative

Association)

Al Musur, Director, Energy and Utility Programs, Abbott

Laboratories and Chairman of the Industrial Energy Consumers

of America

Alexander Strawn, Proctor & Gamble Company and Chairman of

the Process Gas Consumers

ISSUES:

What incentives will encourage companies to begin or

increase price reporting?

Are process improvements by reporting companies (public code

of conduct, independence source, audit of processes)

adequate or are there further improvements that can increase

the accuracy of price indices?

Has industry confidence in prices reported in indices

increased to a satisfactory level?

ISSUES CONTINUED:

What steps can be taken to improve transparency of price

indices?

What further information should price indices provide to

market participants?

Has sufficient progress been made under the Policy

Statement?

Should the Commission adopt further requirements for price

reporters and/or index developers? If so, what requirements

are appropriate?

Should some form of mandatory report be required? If so,

what is the desirable scope of such reporting (Who should be

required to report? Should reporting be to existing index

developers, to an intermediate or depository, or to the

Commission? What data should be required to be reported?)?

What mandatory report materially improve the qty of price

data available to market participants?

ISSUES CONTINUED:

Lunch Break 12:15‑1:15 p.m.

Panel 3 ‑‑ Index Developers\' Response to Industry Views

And Staff Report 1:15 ‑‑ 2:45 p.m.

PANELISTS:

C. Miles Weigel, Senior Vice President, Argus Media, Inc.

Brad Johnson, Global Energy Business Manager, Bloomberg

Ernest Onukogo, Manager, Newswire Indexes, DowJones

Richard Sansom, Markets Editor, IO Energy LLC

Bobette Riner, President, Powerdex

Tom Haywood, Editor, Energy Intelligence Group

Dexter Steis, Executive Publisher, Intelligence Press

Chuck Vice, Chief Operating Officer,

Intercontinental Exchange

Larry Foster, Global Editorial Director, Power, Platts

ISSUES:

What improvements in data collection and price reporting

have index developers seen since issuance of the Policy

Statement?

ISSUES CONTINUED:

How have index developers responded to the call of greater

transparency of indices?

What plans do price index developers have to provide more

information and more transparency to energy market

participants?

Do price index developers meet the standards of the Policy

Statement? Did the Staff report accurately depict the

extent to which index developers had adopted Policy

Statement standards?

Do price index developers support the criteria propose by

Staff for use of indices in jurisdictional tariffs?

How can price index developers facilitate tariff compliance

by pipelines and utilities?

Will price index developers provide FERC with access to data

in the event of an investigation of suspected false

reporting on price manipulation?

Panel 4 ‑‑ Market Liquidity

APPEARANCES CONTINUED:

PANELISTS:

Martin Marz, Compliance manager, North American Gas and

Power, BP America, Inc.

Christopher Edmonds, Senior Vice President ICAP Energy LLC

(Energy Brokers Association)

Pankaj Sahay, Partner, Energy Risk Management,

PriceWaterhouseCoopers

Tom Jepperson, Division Counsel, Questar Market Resources,

Inc.

Vince Kaminski, Managing Director, Sempra Energy Trading

ISSUES:

Is there adequate trading activity at enough locations to

develop reliable price signals for market participants?

What are the characteristics that make for a good trading

hub?

ISSUES CONTINUED:

What steps can the Commission take to encourage the

development of active trading hubs?

What role can electronic trading, confirmation/ settlement,

and clearing play in improving market liquidity.

Can improvements in price indices restore confidence in

price formation given the present levels of trading?

Are there standard procedures that can play a role in

improving price indices and industry confidence in price

formation?

Audience Questions and Comments 4:15‑4:45 p.m.

Concluding Remarks 4:45‑5:00 p.m.

P R O C E E D I N G S

(9:15 a.m.)

MR. HEDERMAN: Okay. Can we take our seats,

please.

(Pause.)

MR. HEDERMAN: Thank you and welcome to the, I

guess, fourth chapter in this effort. I want to welcome our

colleagues from the CFTC who worked with us from the

beginning on this as well. And, also, welcome Chairman

Campbell from the Utah Public Service Commission. I hope we

can stop meeting like this, at least on this topic.

This began as the Commission taking proactive

steps to avert a crisis that appeared to be developing on

the price formation process for natural gas and to some

extent electricity. Thankfully I think we\'ve averted that

crisis that we had our eye on initially.

Today we meet to seek guidance of affected

parties on what the Commission should be doing going

forward. Has the crisis merely been postponed, or have we

turned an important corner? We\'re anxious to hear your

thoughts on that matter. We are anxious to hear your

thoughts on the options that staff has presented to the

Commission. And we are also interested in understanding

whether the price reporting problems will solve themselves

naturally as through improvement of liquidity in the markets

and comments on whether that reporting can improve before

liquidity improves. So, all of these are matters that we

hope to hear your insights on today.

We know that all the market participants have put

a lot of work into this and to working amongst yourselves,

working and communicating with us, and we thank you all for

those efforts.

We look forward to another fruitful day of

exchanging ideas and I\'ll turn to my key ‑‑

MR. HARVEY: Right.

(Laughter.)

MR. HEDERMAN: Yes, to my key partner here on

this, Steve Harvey, to walk us through what we\'ll be doing

here today in more detail.

MR. HARVEY: With this being the fourth sort of

open meeting that we\'ve had about this issue, it gets to be

a little bit of a routine. I usually try to say a couple of

things at the beginning, but we really enjoy hearing from

you all and we\'ll try to get to that as quickly as we can as

opposed to spending a lot of time doing that.

In general I think any statement I would make is

pretty fully encompassed in the staff report that we

delivered, I guess, at that beginning of May, at this point.

There\'s been plenty of time to look at that. I think it\'s a

good coverage of the issue. I hope so.

And I hope that this meeting will be helpful in

giving us some good concrete response to this and maybe move

the debate forward a little bit as I think some of the

previous ones have done.

Let me just describe very quickly what the

intention is for the four panels today.

The first panel was really designed for us to get

more direct feedback specifically on the staff reports

findings and recommendation. That would encompass the

survey results that we have in there, the specific tariff

policy recommendations that we have in there about those

tariff applications, and then finally the more general

public policy options.

The second panel really is focused or designed to

focus more on those general policy options as laid out in

the paper.

The third panel, after lunch, will give us the

opportunity to hear from the index developers and their view

of the status of where things are in this debate.

Then the fourth panel is a little bit different,

designed to broaden the issue beyond the transparency kind

of issues associated with indices and into the area of

market liquidity; is there enough activity, in effect, to

create prices that are reliable and dependable.

Very briefly, what I would like to do is review

the four high‑level policy options that were laid out in the

staff paper. The first was to accept current progress where

the Commission would end active involvement with price

formation issues and permit the industry to address those

issues without any more formal structure or further

guidance.

The second was to continue to focus attention on

the issue where the Commission would actively encourage the

industry to implement the policy statement fully and monitor

closely the level of trading activity reported by price

index developers as well as compliance with the policy

statement standards for reporting.

The third would be to introduce mandatory

reporting where the Commission could move toward some form

of mandatory price reporting of energy trade data as a

number of parties have urged over the last several months,

and, in fact, even in recent comments.

And, fourth, encourage greater reliance on

platforms for trading, confirmation, settlement and clearing

where some parties have observed the most open forum for

obtaining accurate price information is trading on electric

platforms or some of these other automated efforts where

prices can fall out pretty quickly from the information

embedded in those.

Now, the one thing that has become a bit of a

custom for me at the beginning of these meetings is to lay

out the rules of the road. And those of you who have been

here before will be familiar with many of them, but let me

run through them real quickly.

We are interested in lively and active dialogue

today. So I\'m going to ask a few things of the presenters.

First of all, panelists will be limited in their initial

comments to three minutes in order to cover the principal

position or thinking on the issue. I\'m going to remind you

gently, at first, less so later, if you are running over

your time. We need to do that so we can get to the

interaction that\'s proven to be the most interesting part of

this.

Second, we would remind you that the conference

is being broadcast by the Capital Connection, and so it\'s

very important that when you speak you have your microphone

on so that people can hear you.

Third, material anyone considers germane to the

topic of price discovery and electricity or natural gas that

we\'re discussing today should be filed in this docket. And

we\'ve tended to keep that open and we\'re interested in that

kind of feedback. Don\'t know how long that will last, but

we continue to be interested. And as always transcripts of

today\'s discussions can be ordered from the court reporter.

We\'re hoping to leave some time at the end of the

day in particular for any comments from the audience. But

given the number of panelists we\'ve got to go through, it

may be a little tough to do much of that during the course

of the day. We will do what we can to encourage open

dialogue.

Now, having said that, I think we should probably

move into our first panel.

MR. HEDERMAN: Yes.

MR. HARVEY: And what we will do is we\'ll run

through the same order as the updated conference agenda and

that means we\'ll start with Mr. Henning.

MR. HENNING: Thank you, Steve, appreciate it.

My name is Bruce Henning. I\'m director of regulatory and

market analysis for Energy and Evaluation Analysis, and I\'m

appearing on behalf of the American Gas Association here

today to talk about the Staff Report and recommendations for

price indices use in pipeline tariffs.

As a backdrop, let me say that AGA believes that

the Commission\'s actions to focus attention on improving the

reporting of an indices has been partially responsible for

the trend towards improved confidence in the price

information. This course of action should continue. That

being said, AGA also appreciates the Staff\'s emphasis that

Staff is not evaluating use indices for general contract

use. I do not believe that there is a single standard for

sufficiency that\'s applicable for all general business

purposes. Each party must evaluate the index in the context

of business decisions.

Even for an individual LDC, sufficiency will

depend upon the circumstances being evaluated. An LDC that

is considering a 10, 15, or 20 year contract for the

purchase of LNG would have a very different standard than if

they\'re looking at daily, monthly, or balance of the month

transactions.

In the context of the use of jurisdictional ‑‑ of

indices in jurisdictional tariffs, I want to make one

overarching point. The Commission must not take any action

that threatens the viability of an efficient cash‑out

mechanism, and that mechanism exists today. Cash outs are

much more efficient than any other make‑up mechanisms and

should not be disrupted.

That being said, AGA believes that the Commission

has correctly identified three key metrics in evaluating the

validity of the index and jurisdictional tariffs.

Transaction volumes, the number of transactions, and the

number of counterparties are all important in evaluating

liquidity and in confidence in the index.

However, we note the one apparent inconsistency

between the language and the executive summary of the report

and in the body. The summary refers to a minimum level of

activity during an evaluation period, while the body refers

to average daily volumes, average number of transactions and

average number of counterparties during their respective

evaluation period.

The language in the body of the report is more

appropriate for maintaining the viability of the existing

cash out mechanism.

Finally, in terms of implementation AGA Is

hopeful that the index developers will indicate today in

this conference that they\'ll be able to meet the September

1st deadline for compliance with the recommendations.

However, even if the index providers meet that deadline,

there are significant difficulties with the staff

recommendation for the timing and evaluation of all points

refer to few in pipeline tariffs. If an index comes into

compliance on or near September 1st, the data for the

evaluation period may not be available until almost the

beginning of December, right in the middle of the winter

heating season.

Rather than impose an uncertainty in cash out

systems at that critical time AGA recommends that the

pipelines and their shippers be allowed to propose

appropriate solicitations in the context of the Commission\'s

evaluation criteria after the heating season is over.

One final comment. After an extremely difficulty

period transparency and confidence in price reporting has

increased markedly. One factor that contributes to that

confidence is multiple independent sources of information

that can be corroborated with reported data. My

understanding that the Commission staff uses this kind of

comparison just to validate the data, just as industry

participants do, the existence of these multiple sources

adds confidence in transparencies and should not be impeded.

Thank you.

MR. HARVEY: Thank you, Mr. Henning.

Let\'s go to Mr. Rozgony.

MR. ROZGONY: I\'m from AGL Resources. I\'d like

to compliment FERC for their leadership shepherding the

industry on these critical issues.

In the June issue of Energy Risk Magazine, CFTC

Commissioner, Sharon Brown Hreska, was interviewed about the

subject of managing manipulation in the energy markets. She

was emphatic on one particular point. She said, \"It is my

view that prescriptive regulation cannot address the

problems being experienced by the energy sector, but may

exacerbate a liquidity shortage by unnecessarily imposing

costs on industry participants and create regulatory and

legal uncertainty.\"

Again, she repeated, \"let me be clear, I mean to

sound an alarm here. These markets are vital to ensuring

cheaper, less volatile energy resources. Overly

prescriptive requirements for market transparency or

mandatory transaction reporting could do harm, raising costs

without direct benefit.\"

Let our company, AGL Resources be an example of

her contentions. The question we asked ourselves at our

company was how do we best serve our shareholders and the

best interests of our industry at the same time.

We have been very judicious within our company

evaluating our approach to price reporting from the

frontlines up to the board level. We determined that there

are two primary goals for our company regarding the issue of

price reporting. First, make the most empirically, logical,

economic financial decision in the best interest of our

shareholders.

Second, support the industry and markets by

facilitating a solution that provides both new discipline

and vision.

With regard to the first goal, our 2004 annual

report tells our shareholders that to us no opportunity is

too small. We focus on the bottom line, the top line and

every line in between. An enormous and burdensome de facto

tax has been levied on corporate America with new

Sarbanes/Oxley and corporate compliance rules. Every

company is suffering through this process and financial

expense. Additionally, in the energy sector, the issues at

hand also bring with them new burdensome processes and

financial expense.

We would have to go through a costly and rigorous

process to export price data so that another company can

financially benefit. These added processes and expenses

only serve to provide income to another company, not our

shareholders. We don\'t even get a free subscription in

return.

We have a fiduciary responsibility to our

shareholders, new infrastructure, new process, new

governance, new staffing, new compliance all cost money.

This is a material, economic fact that we cannot ignore if

we are to operate efficiently in the best interest of our

shareholders. Although we respect the competitive

opportunity of other indices publishers, we do not wish to

support the industry by backing in an inferior solution.

Especially if that solution creates an economic burden for

every company and its shareholders when there is a more

efficient alternative.

As a company we have decided to contribute to the

industry by helping to facilitate a new and better solution.

This industry is very fortunate to have these electronic

trading platforms in the physical energy markets. No other

physical commodity market has the benefits of this solution

at this time.

With regard to our second goal of supporting the

industry, our company executes approximately 85 percent of

our next‑day transactions on ICE. And we think that is a

very significant contribution to price formulation and

indices reports that are published by ICE.

We also hope in the near future to utilize the

value of E‑confirm which we also think is a superior product

for the industry. I sit on the AGA task force for price

reporting reform and have introduced AGA to ICE and helped

facilitate dialogue that would better educate the AGA

members on electronic platforms as a solution.

I have also met several times with ICE executives

with regard to these critical issues at hand, and more

recently I\'ve met with the new chairman of NYMEX and

discussed at a high level the potential solutions that

electronic platforms offer to the industry such as ICE,

TENEX, E‑confirm, and NYMEX Clearport.

In sum, we as a company have endeavored in the

campaign to bring together the very players of the solution

we as a firm believe in. We most effectively assist the

industry by supporting the superior solution. We believe

options A and D presented in the report are the best

solutions going forward.

Thank you.

MR. HARVEY: Thank you.

We would like to move to Mr. Santa.

MR. SANTA: Good morning. My name is Donald

Santa. I\'m the president of Interstate Natural Gas

Association of America. I\'m here today on behalf of INGA\'s

interstate pipeline members.

I\'d like to focus my comments on the

applicability of the proposals in the Staff policy statement

to interstate pipeline cash out mechanisms.

It is imperative that the pipeline industry

continue to have the ability to reference index prices that

bear a close relation to the market conditions at the

locations that pipelines and their customers buy and sell

gas to resolve imbalances. Why is this important?

It\'s important because a disparity between the

location on the system and the index point can create an

economic incentive for shippers to go short or long on

pipeline imbalances. Let me illustrate this point with an

admittedly extreme example.

Let\'s assume that Henry Hub was the index point

and that for the New York City region the cash out was the

Henry Hub price plus transportation. Clearly, during the

winter heating season this price would bear little

relationship to the market clearing price for natural gas in

New York City. There would be a great incentive for a

shipper to short the pipeline.

While this example is extreme, it illustrates how

a disconnect between the conditions at the index point and

the market in which the pipeline and its customers are doing

business can affect economic incentives. And given the

current high gas prices and levels of volatility, this can

add up quickly.

What happens if as a result of the disparity

between the index and the market the pipeline has an

imbalance. Some pipeline tariffs include mechanisms for

surcharging shippers for the imbalance, others do not. Some

pipeline tariffs allocate the surcharge directly to shippers

who cause the imbalance, others use different allocation

methods.

My guess would be that if the imbalance account

levels grow as a result of disconnect between indices and

the actual market conditions, this will become a much more

contentious issue.

Furthermore, as a practical matter, the pipeline

is not guaranteed the recovery of the imbalance account.

Because of volumes in a subsequent year fall short of the

design volumes use for the surcharge. Or if the pipeline

moves greater discount volumes than projected, the pipeline

could end up short on its collection.

Don\'t get me wrong, pipelines want gas price

indices that are accurate. The more accurate the index, the

less of an incentive there will be for shippers to go short

or long on the pipeline. But pipelines do not want a

situation in which the search for the perfect index leaves

us in a situation that undermines the workability of the

cash out mechanisms in the pipeline tariffs.

Second, as highlighted in INGA\'s written

comments, we have got concerns about the workability of the

implementation schedule proposed in the staff paper. Staff

proposes that effective September 1 from each index location

used in a jurisdictional tariff the published index must

meet the criteria. It becomes awfully difficult to

implement this if we don\'t know until September 1 whether an

index provider qualifies or whether particular index points

qualify.

I would suggest that the Commission take this one

step at a time and allow an adequate interval between for

the industry to react to what is established.

Finally, INGA suggests that the Commission would

need to act under Section 5 of the Natural Gas Act to change

existing pipeline tariffs should it wish to proceed.

In doing so, the Commission must show that the

pipeline\'s current cash out point is no longer just and

reasonable, and also that the substitute that it prescribes

is just and reasonable. Should a number of cash out points

fall away by application of the Staff\'s criteria and the

pipeline is required to cash out at a distant point from its

market, it\'s not clear that the Commission could justify the

substitute point as being just and reasonable.

This I think also reinforces a point that there

really are not and have not been serious complaints about

the use of indices in pipeline cash out mechanisms.

Consequently I would suggest that a prudent approach would

be for the Commission to apply its criteria in the event

that there is a complaint about a particular pipeline\'s cash

out, or if a pipeline comes to the Commission to modify its

cash out. There does not appear to be a strong

justification for acquiring an across‑the‑board revision of

pipeline cash out mechanisms.

MR. HARVEY: Thank you.

Mr. Strawn.

MR. STRAWN: Good morning. Thank you very much

for the opportunity to speak. My name is Alexander Strawn.

I oversee all of the physical contracting of gas for Proctor

& Gamble in North America. I also happen to be sitting here

today representing the Process Gas Consumers Group otherwise

known as PGC. We are an active trade association of

industrial gas consumers who require natural gas in most of

our key operations. And we have a broad cross‑section of

membership representing just about every single business

entity in the United States and we consume over half a TCF

of gas annually.

We work generally to promote a coordinated and

rational and consistent approach to federal and state

policies in reaction to natural gas supply and demand.

In general I am very pleased to report from our

membership and the cross‑section of companies that I

represent that we have a high level of confidence in the

price indices as they are standing today. And as indicated

in the May 5th staff report, industrial confidence is at a

level of 7.43 on a scale of one to ten. All of our members

pretty much reflect that same level of confidence and we are

very pleased to report that to FERC today.

As shippers on interstate pipelines across the

grid, Process Gas Consumers is very familiar with the use of

indices and tariffs to calculate such things as penalties

and cash out and has been very active in negotiation of

pipeline cash outs and penalties in general.

In the event that the Commission determines that

certain indices or points cannot be used in jurisdictional

tariffs, PGC has some concerns about the implementation of

the Commission\'s new policy which I\'ll detail later in the

Q&A.

And, finally, we believe that competitive,

multiple sources of reporting are vital to a consistent and

healthy market, introducing new indices that perhaps bring a

note of uncertainty to markets that are already challenged

and supply and demand is not a path that we prefer to go

down at this point.

Thank you very much.

MR. HARVEY: Thank you.

Mr. Allison.

MR. ALLISON: I am Jim Allison with

ConocoPhilips, where I am the regional risk manager for gas

and power traded activities in North America.

Let me begin by congratulating the Staff for the

wonderful work they have done getting the survey out,

getting the survey analyzed and producing the report. I

understand that none of the survey results were in ahead of

schedule and a tremendous amount of work got done in the

roughly 30 calendar days, which turned into, I guess, 30

working days also before the report came out; 300 pages of

SAS tables, and 60 some pages of text describing the results

is a very impressive accomplishment.

Bill, in his opening comments, asked whether the

corner has been turned. I would suggest that it has been.

There are many causes for that. I would highlight one thing

as a triggering event and that would be the guidelines that

the Commission issued last summer. I think revolution is an

appropriate term to describe what that accomplished in the

price reporting practices.

Once upon a time price reporting was done by

traders very informally. Now price reporting is done out of

our system it is done by the risk management or other mid‑

office people. It is a professional, auditable process that

one can fairly hold up the light of day. And I believe that

has resulted in a tremendous change.

As with most revolutions consolidation of the

benefits is taking longer than declaring a revolution. And

we see that in the survey and the rate at which volumes are

coming back in which people reporting are coming back to

business. Even with that, for the October to February time

frame the data and the report, I believe, strongly support

the notion that people (a) express confidence in the

indices, and (b) back that up with their capital by using

the indices.

I can comment at more length upon my reading of

the data but the people out there are in fact using indices,

on average, about 62 percent of the volumes transacted are

priced off indices. So a very large number of capitalist,

profit‑driven companies have put capital at risk using the

indices. They would not do that if we didn\'t trust them.

This is backed up by the statements from our

customers. Our customers who are consumers of gas, like

Alex, are not happy with the level of price. If you are a

gas consumer, \$6 gas is not good news. They are, however,

telling us that they are by and large happy with the

indices. And, in fact, my traders tell me that with the

current level of high prices we see customers choosing to do

business on an index basis rather than a fixed‑price basis.

At the current price level they do not wish to take the

fixed‑price risk, they choose to use indices instead.

Again, if they were not confident in the indices,

they would not make that decision. We would be happy to do

the business with them on either pricing formula.

The other question, I think, is where do we go

from here? The Commission articulated four options. I

think the staff wisely highlighted the costs and risks

associated with mandatory reporting. I believe that would

be a grave blunder for the country to move into at this

point. I\'ll not amplify on the comments that the staff had

in their report. I think you did a good job covering the

implementation difficulties and costs that would bring.

Neither do I think we can simply declare victory,

close up shop, and move on to everything else. I believe

the market is way too important to American consumers not to

have some degree of continuing oversight. And I believe

that is part of the Commission\'s role. Other reports, other

suggestions were with respect to the use of the electronic

platforms. I\'m a big fan of electric platforms. From a

risk manager\'s perspective, they make my life much easier,

partly because they\'re standardized, they\'re transparent, I

get good information and because they\'re electronic, I have

a prayer being able to automate data feeds which reduces my

costs. All of that is good. However, roughly half of the

business done in both the day‑ahead and the bid‑week market

is done directly bilaterally with customers rather than over

electronic platforms partly because the customization, the

customer\'s desire, one of the strengths of electronic

platforms is the standardization of contracts. But when you

are trying to meet the needs of a customer, that is also one

of the weaknesses of electronic platforms.

I don\'t believe the Commission needs to do

anything beyond what it has already done to encourage us to

use platforms where they are suitable for the task. We like

the benefits of platforms, they make our lives much easier,

but they are not always the right tool for meeting the

customer\'s needs.

One other issue I would raise in terms of our

path forward, in terms of what changes in the system really

would add substantial value. And the one issue I would

highlight for the Commission would be something that helps

us address the credit problem. We have come to realize,

somewhat belatedly, how much economic capital is absorbed

through credit exposure. Once upon a time we had grossly

under estimated that parameter and some companies that are

no long with us are not with us because of that problem. We

have had lots of discussions about tools to address the

credit issue. I think there are a couple of things the

Commission can do to help push this forward and a couple

things the Commission should refrain from doing because it

would get in the way.

Among the things the Commission should refrain

from, I think the Commission cannot be in a position of

decreeing the solution. I don\'t think we know what the

answer is yet. So I don\'t think the Commission ought to be

imposing a credit solution at this time. In particular I

know there have been some groups out there who have been in

effect asking for monopoly licenses for particular

solutions. I think that would be a mistake; (a) I\'m opposed

to monopolies; (b) I\'m not convinced they got they\'ve got

the right answer.

On the affirmative side, I think there are a few

things the Commission could be doing that would be extremely

helpful. First, your influence with the state regulatory

groups could be very helpful in having the states recognize

that the credit issue really is a broad national issue, not

a local state issue. And that the proper solution of the

credit issue needs to have all of the participants in the

market as part of the solution, not focused on one sector of

the industry.

Some of the state public utility commissions

have, partly because of who they regulate, tended to focus

on one segment of the market and have missed other segments

of the market.

I think the Commission could play a very helpful

role helping to guide the public utility commissions and

seeing this as part of the national issue and getting all of

the players into the credit solution rather than just one

side of the market.

We have had lots of hopes for mechanisms such as

clearing. They have come to pass more slowly than one might

have hoped. Although the growth in the NYMEX Clearport

contracts has been very encouraging. We have had lots of

hope for things like margining and netting agreements.

Those two are coming to pass more slowly than many of us

might have hoped.

I don\'t know that we know what the right answer

is. I think the market is more slowly than I would like,

but I think the market is evolving toward a solution. And I

said, there are a few things the Commission can do that will

help the market evolve toward a good solution. I think this

is not the time to decree what that solution would be.

I am happy to address the details of the report

later on.

MR. HEDERMAN: Thank you. I\'d like to start with

a question for Mr. Rozgony. You were talking about the

immense costs that might come with a mandate. Have you done

any ballpark estimates of those costs?

MR. ROZGONY: (Off mike.) I couldn\'t give you a

number, but I did determine that ‑‑ I\'m sorry. I don\'t have

any specific numbers. But we did determine that we would

have to hire new employees. We did determine that we had to

reengineer our systems. We did determine that we would have

to involve our legal department to a greater degree through,

you know, new compliance requirements around this issue.

So when you add all those up, just intuitively it

is an expense. I don\'t have a specific number, but I would

say that it\'s material, it\'s when we are evaluating some of

our smaller subsidiaries. It\'s a material effect.

So, quite simply there is clearly an expense and

there\'s clearly a savings by the fact that we are actually

saving money by utilizing the electronic platforms because

there\'s no burden of exporting data. You know, it\'s

directly, we don\'t even calculate. I mean, we don\'t do

anything. Our consummated transactions which are

approximately 85 percent of our transactions get captured in

their ‑‑ I\'ll call it a clearing mechanism, it\'s not exactly

a clearing mechanism, but ‑‑ and combined with the E‑confirm

product and produce just very efficient weighted average

calculations that, you know, I don\'t think anybody can argue

are the most auditable real‑time solution out there. So we

see that not only does it benefit us, but it also produces

the best result.

Did that answer your question?

MR. HEDERMAN: Yes, thank you.

Steve.

MR. HARVEY: I\'d like to ask and maybe several of

you, but in particular Mr. Henning and Mr. Santa, help me a

little bit just kind of lay out the implications in effect

of not being able to use the indices for these cash

balancing mechanisms. Some of the mechanics of ‑‑ you know,

on the one hand we\'ve got some timing issues that you\'ve

expressed concern about. On the other we do have ‑‑ you

know, there is potentially a threshold where an index is not

sufficiently good to be used in that case.

What is in effect the next best solution and what

are sort of the consequences of not being able to do it

through cash balancing mechanism? Just draw me a sort of

mental picture of this thing a little bit.

MR. HENNING: Well, I think for the mechanism to

work, and for it to be efficient as it is now, it\'s got to

reflect the value of natural gas within that particular

market area. In other words, to be a mechanism where it is

tied in there.

I think that when you look at the issues, you\'re

going to find that with a variety of different data sources,

you can find indices that will reflect the value of natural

gas in those market areas on those pipeline systems. Now,

does that match up with every one according to this

efficiency criteria that\'s proposed in the Staff Report?

No, maybe it doesn\'t. But there will be a mechanism to

identify those and the pipeline and the shippers should have

the time to be able to go forward and find those particular

things.

In the absence of that, there is a risk that you

will have a gap where you won\'t have a viable cash out

mechanism and that\'s what I think we\'re looking to try to

avoid.

So I think that the issue of timing in terms of

how you go about identifying those solves the problem that I

think you\'re referring to which is, you know, what happens

in the absence of any viable measure of the value of gas on

the pipeline system at that point.

MR. SANTA: I would add that if you had a

situation where you could not use an index and you were

forced for purposes of that you ‑‑ then could you do a cash

out. Good question. If you couldn\'t do a cash out, then do

you go to resolving imbalances with in‑kind payments of gas?

Which I think would be much less efficient and potentially

could create operational problems for the pipelines. For

example, if someone did not resolve their imbalances

promptly and increasingly got out of balance, how do you

penalize that customer and give them an incentive to get

back into balance.

Also, to the extent that the imbalances went

toward the side of the pipeline being short gas, the

pipeline increasingly would have to draw upon its line pack

or other sources of gas to operationally meet the delivery

requirements. Which then at some point compels the pipeline

to have to go the marketplace and become a purchaser of gas

to replenish that line pack.

And, again, as you have a situation where

customers would get increasingly out of balance, the pipe

would go back to being more and more involved in the

commodity end of things by having to go out there and become

a major purchaser of gas or quite frankly if things went the

other way possibly a seller of gas.

And while the pipes do some of that activity

today, it is very, very de minimus. It\'s like you got a

threshold question, do you want to put the pipes back in

that role. And I think it\'s a reason why you would want to

try to find a viable means to have, as Bruce said, some

indicia of what is the market price of gas in those markets

where the pipes are doing business.

The other point I would make is I know that the

staff paper drew the distinction between the use of the

indices and the pipeline tariffs, and the commercial use of

the indices. And in the commercial use of the indices it

talked primarily about it in bilateral transactions. But, I

mean, I think the other thing here, the part that that

missed, and what I think was probably one of the real

drivers as to why this became such a great issue was the

fact that within restructured power markets and if the gas

generators were at the margin, and if the price of gas is

what is largely driving the incremental price of power, the

concerns that if there was a distorted price of gas that was

reflected there, it would translate very concretely into the

electricity prices.

And I think that\'s a problem of kind of a whole

different order of magnitude than the concern about pipeline

cash out mechanisms and the accuracy of the indices where

the volumes and what is at stake are far less. And also

quite frankly it\'s an area where while pipes and their

customers may fight about the cash out mechanism and the

context of a tariff proceeding and all the intricacies of

it. It was not something over which there was a major human

cry that something was out of whack that was adversely

affecting the market or consumers.

MR. PERLMAN: Can I ask a really quick follow‑up

question to both of you?

When the staff proposed those criteria and tried

to be sensitive to the issues you\'re talking about and try

not to cause problems for existing pipelines, thinking that

many of the tariff provisions that use cash outs today based

upon indices would not be affected. Have you gone back or

your members gone back and looked at whether there really is

a problem if the staff\'s criteria where adopted, would there

be issues with existing tariffs that would cause the need to

make changes? Or would most of them, if not all of them be

found to have met that criteria?

MR. SANTA: Dave, I\'m not sure to say we\'ve done

it exhaustively. However, INGA and its members have gone

back and looked at it. One of the questions we have has to

do with kind of some of the ambiguities about how the

criteria would be applied. Because, for example, there are

individual days when a particular point on the daily basis

may not have either the requisite number of transactions or

requisite volumes to qualify.

Well, how is the Commission going to treat that

for whether or not the point on the whole qualifies? Are

you going to look at it over that 90‑day period and somehow

average it in a way that will recognize that maybe on

isolated days it may not comply? Or is this going to be a

case of if you don\'t meet it on one day or you don\'t meet it

on a handful of days it\'s out. So I think that, you know,

some of that in terms of the details as to how those

criteria will actually be applied, I think will affect the

degree to which a number of points ‑‑ significant number of

points drop out.

MR. PERLMAN: Well, we\'ll assume that you can

make the conclusion that it would be the average rather than

the specific day.

MR. SANTA: If it is the average, it is ‑‑ I

think it would be much less problematic. However, I can\'t

say that ‑‑ you know, we\'ve gone back and have exhaustively,

you know, analyzed it to see how many will drop out if you

did it on the average versus the isolated basis. I can say

that on the one thing that did come through from our looking

at it was that with respect to ‑‑ rather than the daily, the

monthly, to the extent that there is any reference to the

monthly, there are far fewer points that will qualify using

the monthly criteria.

MR. HENNING: One thing that we did and tried to

take a look at the particular issue was we just for the sake

of the ease of downloading the data, we actually looked at

all of the points reported by ICE and looked at the daily.

And applying a rolling 90‑day average period, the vast

majority of those points, although there are few in the

daily market that would meet the proposed criteria. Now, AJ

member companies differ as to whether or not that is the

exact correct criteria. And I\'m not taking a position on

that. But just illustratively on the daily most of those go

and pass.

If you were to apply the minimum threshold

interpretation then over half of those points drop out. So

there\'s a significant difference in terms of the

interpretation there.

Many more of those points are problematic from

the perspective of a monthly contract. And so there may

well be some points that at the end of the day don\'t meet

that criteria and you\'re going to have to have the time

available for the pipeline and the shippers to evaluate that

data and propose what alternatives might be appropriate.

MR. STRAWN: If I could make one other comment,

too. Just in general I kind of echo the same sentiments

here. Any time you\'re going to bring another level of

uncertainty to the cash out provision for these supposedly

less liquid points, you\'re going to cause more complexity to

the overall system, more challenge, more potential

litigation, more protracted analysis of those points, and

more involvement by all parties in an area that largely

hasn\'t been in great dispute.

And if you throw it into that level of

interaction, then what\'s likely to happen is you will have

more and more individual negotiation that goes on and maybe

even less reporting of what actually those points will be.

Because most of the discussion will be with the two parties

involved.

Right now, at least you have the liquidity

associated of what\'s reported even though it may not meet

the test of what you consider to be actively liquid. But

bottom line it adds more complexity and more challenge of

the parties involved.

MR. PERLMAN: But just to be clear, I thought I

heard Mr. Henning say that it was important that the tariffs

have an index, if there is an index used for cash outs, that

it have some meaningful relationship to the location.

And I think the question that we would have is

how do we validate that if the index is usable, and meets

the criteria the Commission can use to say it\'s just and

reasonable, and I\'m hearing, maybe I\'m mischaracterizing, so

I\'ll ask you to explain that. If it didn\'t meet whatever

criteria that we were to establish, it would be the next ‑‑

Steve was, I think, implying ‑‑ the view I\'m hearing is that

the next step, the uncertainty or the in‑kind type of issues

are more material than having a problematic index. So we\'re

sort of stuck with trying to do the best we can with the

indices that we have because the next best is worse. Is

that a fair characterization, or am I overstating the issue?

MR. SANTA: I think it goes to the point that I

made earlier about if, you know, as Mr. Strawn just said,

you know, even if it maybe doesn\'t precisely meet it,

depending upon how you apply it, but nobody is really seeing

themselves as being at a disadvantage in the marketplace.

And that should be a strong indication that there\'s not a

problem and there really is not a need to say to the

pipeline you must come in and amend your tariff and either

use a point that meets the criteria or go to some

alternative.

You know, by the same token, if those who are in

the marketplace and dealing with this in the context of the

cash out don\'t have confidence in that point and want to

come to the Commission and say, you know, please make the

pipeline revise its tariff so as to get in a point that

meets the criteria, then as I suggested up front, you know,

that would seem to be a prudent approach where it would

address a problem to the extent that it was a problem. And

yet not create potentially complexity and contention where

there isn\'t one.

MR. HENNING: On point, the AGA member companies

who have looked at this, as I said, believe that the

Commission and staff has correctly identified three

important metrics. And so if in fact, we move forward, and

I hope we\'ll hear this afternoon, the index providers can

provide information on volumes, numbers of transactions and

numbers of counter parties, that information is going to be

available and you\'re going to look at that and you can

determine whether or not you\'re using an appropriate index;

and if not, then you talk to your pipeline in terms of how

it can go forward.

I think that that\'s going to be a positive step

in having that information out there. But it\'s the issue

and uncertainty that would be created by a time schedule

that would imply that you wouldn\'t know that at the time and

be able to approach your pipeline and come up with the most

appropriate workable solution. I mean, once that

information is out there, analysts such as myself and the

member companies are all going to be looking at it just as

the Commission will.

MR. STRAWN: One final point, if I may add it.

And that is that particularly if we were to look at this in

a more exacting way and not use those points and apply it

retroactively where you have some cases that are pending,

that would just cause unbelievable confusion and

consternation amongst the people and the parties that are

involved. And for that reason, if nothing else, we would

favor continuing monitoring and just some type of ongoing

evaluation as opposed to a definite move toward elimination

of those points.

Thank you.

MR. STRZELECKI: A question for Mr. Henning, a

follow‑up question.

If a pipeline determines that an index point does

not comply with our criteria, you said then there is this

process that goes to value what your next step is. Transco

in their comments, I believe, called it the transition

process and they recommended a 60‑day timeframe to do this.

What timeframe do you need to find another point that

qualifies or another solution to the problem?

MR. HENNING: I think it\'s hard to say that

there\'s a particular number that will always be there. And

I think that obviously it\'s going to have to deal with the

individual specifics of that pipeline system and identifying

an appropriate index that reflects the value of gas at that

system.

I think a concern is whether or not in the

process that\'s contemplated here, doing all of that for all

of the points on all pipelines in a time period that\'s

putting you over the winter heating season. And so the

recommendation is let\'s go forward, get the appropriate

metrics out there to the greatest degree possible, the

information, and allow that ‑‑ the shippers, the LDCs, the

pipelines, all other shippers on the pipeline to get

together and figure out what that is after the winter

heating season.

MR. STRZELECKI: Okay. And just one more

follow‑up. In the Staff Report we recommended or threw out

a September 1st implementation date for the criteria. And

some pipelines and commenters had problems with that. What

would you recommend as a reasonable implementation date? I

think National Fuel said June of 2005 after the heating

season and such. What would you guys recommend?

MR. HENNING: Within the membership there\'s no

particular date that they agreed upon at that. So I can\'t

give you a particular date there. Again, though I\'d say

what I am hopeful is we\'ll hear, and frankly the local

distribution companies can\'t know what the index providers

are going to say, we\'ll hear that later, what we\'re hopeful

is that we\'ll start getting that data and be able to look at

it with all of the elements of the metric that are being

recommended on or about September 1st. We are already

seeing some improvements in terms of the information. We\'ve

got more data now to analyze than we did a year ago, and

that\'s a very positive movement. Part of it because the

industry did step up in the process making their own

recommendations and the Commission is adopting those

recommendations as well through the CCRO process and the

Commission\'s actions on it.

So I think we\'re moving in that direction. And

hopefully by September 1st we\'ll be able to get that

information from all the index developers.

MR. STRZELECKI: Okay. Thanks.

MR. ALLISON: Let me add a comment on that, if I

may. The view of this panel is that the cash out process is

by and large working pretty well right now. As we implement

new criteria, we therefore need to be a little bit careful

that if the criteria result in rejecting particular points,

in contrast with the current view that the market actually

is working pretty well, most of those rejections probably

should be viewed as highly likely to be false negatives in

the sense that the criteria have said an index is not good

when in fact the market has said it is good.

We haven\'t seen all the data. Therefore, we

don\'t know what the data will show. There has been some

analysis done that is generally encouraging. But I think

the fair statement is, anything implemented September 1

probably should be viewed as tentative. And we need to

evaluate how it actually works in real life.

If the criteria, whether it\'s average or minimum,

whether it\'s 90 calendar days versus 90 trading days, if the

criteria result in rejecting lots of points, then the

criteria, I think, by definition have been set too strictly

and will need to be modified.

I don\'t know that it is possible to know ahead of

time what the right criteria are, because there are all

these unintended consequences from it.

So I would suggest that viewing a September 1

date as a tentative, perhaps experimental period, in the

market April 1 is traditionally viewed as the beginning of

the summer trading season, June 1 is a time when volatility

typically is low. I don\'t know that there\'s anything

magical about either of those as a target date for a more

permanent ‑‑ and in fact \"permanent\" probably is way too

strong a concept for any of these things, but we do need to

be very, very careful to watch out for the false negatives

from whatever criteria are established.

MR. O\'NEILL: Could I ask you to clarify what you

mean by ‑‑ you said, \"a false negative is good\" or that the

\"index is good\". What do you mean when you say an index is

good?

MR. ALLISON: By a \"false negative\" I mean, the

result that applying the criteria means that an index would

be rejected as not allowed for the purposes of cash outs.

That is a false negative if the market has formed the

opinion that that index actually is quite useful for the

purposes it\'s being used for, cash outs, trading, other

things. There may be particular markets where the indices

are viewed as highly reliable. Even though they fall short

of the kinds of criteria that have been set. We simply

don\'t know yet. But the market has had a fair amount of

experience dealing with these things and has evolved toward

particular patterns of use.

As previous speakers have said, there hasn\'t been

a tremendous human cry about the cash out process. So the

evidence by and large is that the indices that are currently

being used seem to be working pretty well. So I think there

is probably a presumption that they are good for the

purposes for which they\'re being used.

MR. O\'NEILL: I understand that. But I mean, I

don\'t know what it means to say, working well and good. I

mean, yes, they work well because they provide people a way

to calculate cash out numbers. They really work well

because there\'s a number there and you can cash out on that

number. But how good is that number? Is it just and

reasonable?

MR. ALLISON: It is used without objection by

parties that have alternatives both for cash outs and for

sundry other commercial transactions.

MR. O\'NEILL: And you are proposing that as our

standard?

MR. ALLISON: And I recognize that standard has a

lack of objectivity that makes it difficult for the

Commission to use only that. And I therefore recognize why

you want more numeric standards such as the ones proposed.

My cautionary note is that when we observe a conflict

between these numerical criteria and the actual market

behavior, we need to be very careful before we say that the

numerical criteria are right and the market behavior is

wrong.

And I would suggest that in most cases the market

behavior will have been correct and we ought to give strong

consideration to the possibility that the numerical result

is, in that sense, a false negative.

MR. O\'NEILL: Yes. I don\'t want to be

oversimplifying, but I guess is the answer, if both parties

are happy, we should be happy?

MR. STRAWN: I would say that. And I would

certainly indicate that ‑‑ echoing Jim\'s sentiments ‑‑ that

if you throw it into some level of uncertainty, that\'s the

worst thing that can happen to industrials. Because most of

the time these types of discussions are held up front or on

an ongoing basis. And there\'s an understanding and

acceptance of what\'s there. Even if there is some question

later about the liquidity, most of the ‑‑ as mentioned by

the Commission, most of the people involved in these

transactions and understanding the method of cash out, have

already agreed on these points up front, and they understand

whatever implied volatility there is there.

But if you start to introduce ‑‑ again, I have to

say, this over and over again, if you start to introduce

uncertainty in September or October or whatever time you

prefer to introduce these potential indices changes, that is

what concerns industrial consumers. Because anything that

heightens volatility is what we worry about, overall

volatility. And by actually doing this, and in the

Commission\'s view think that you\'re clarifying, you may

actually add potentially to the volatility. And that

bothers us.

MR. CHOO: I seem to hear the sentiment that

maybe things are all right and we don\'t need to have any

criteria. And we want to just use the complaint process,

whatever the criteria may be, to settle any disputes. Is

that the indication I\'m hearing from most of the commenters?

MR. ROZGONY: The only thing I would add is just

to answer your question, yes, if both business parties are

happy in the transaction, that\'s a pretty good thing. If we

can get to that point I think there\'s a lot of success in

the business overall.

Two parties happy in a business transaction is an

accomplishment.

MR. HENNING: Another thing I would add just as

well is at the same time the Commission\'s actions that are

moving towards more information being available for all the

parties to evaluate that, also then improves the result when

you have both parties being happy. And in getting the

appropriate metrics, having the volume of transactions and

counterparties available is going to help.

MR. HEDERMAN: Mike McLaughlin, you had a

question.

MR. McLAUGHLIN: I can understand the unease

about potentially calling into question the existing indices

that have been adopted in the Commission\'s tariffs and the

uncertainty that would bring about the review of those to

apply them to the staff standard, and, you know, the debate

about the timing of when that would be done or should be

done. But, what about the idea of applying the staff

standard to new filings? Because unlike being already in

the tariff, we do not control when companies or pipelines

make new ‑‑ you know, filings to incorporate new indices

into the tariffs. You know, we\'ve experienced that over the

last number of months.

Does the idea of applying the standards proposed

to new filings cause you heartburn?

MR. SANTA: As I mentioned in my comments, Mike,

I don\'t think it causes a great problem for the pipeline

industry. And I think it\'s a more prudent approach than

effectively ordering all pipelines to come in and file and

also, as I said, you know, to the extent that there were a

dispute where a shipper or some party felt that the index

point along the pipeline was not indicative of the market

conditions, it would seem to be a good starting point for

evaluating a complaint.

MR. STRAWN: I think I would have less concern ‑‑

I have overall concern with any change in this area, but I

would have less concern on a future basis as opposed to

retroactive. But just overall, I think I have to mention

Jim\'s comments again, and the fact that if you want to take

a step in this area, maybe a slow evaluation step, or a

slower evaluation step, as opposed to a mandate, it will be

this way immediately. Even in future markets would probably

be more advisable from our point of view.

Because, again, every step you take adds to

volatility. And as people understand what you are trying to

do and understand that you are actually trying to help the

overall situation by adding liquidity and understanding of

the market, I think there\'s less concern and less

possibility for suing. So I guess I would say, I\'d give

that a tentative agreement that at least evaluation of that

aspect would be preferred to certainly any retroactive or

concrete minister.

MR. HENNING: Where the pipeline is getting ready

to make a new filing, in most instances this happens and in

all instances I think it should. There will be a

communications between that pipeline and the shippers. When

the information that we are talking about is available in

terms of volumes, transactions and counterparties, the

shippers and the pipeline will be looking at that

information and figuring out what particular points should

be referenced in that tariff.

So I think going forward what you will see is on

the basis of having more information out there, you\'re going

to get requests that make more sense in terms of having the

gas valued appropriately in the market place. And that

should help you.

MR. ALLISON: I\'m a bit uneasy about any set of

criteria until we\'ve had a chance to see how they actually

function in the real world. If we have an opportunity to

observe how well they function and tune the criteria which

might imply making them less rigorous, might imply making

them more rigorous. But if we have the chance to tune the

criteria, then after they\'ve been tuned, I don\'t have any

inherent objection to using them on new filings. But I do

think the opportunity to tune the criteria so that they do

what they are designed to do and intended to do is

important.

MR. PERLMAN: Can I just ask a final question on

this to make sure that we\'re all on the same page. If we\'re

looking, the Commission has to address new filings and make

judgment whether the filing is just and reasonable in all

respects. And I want to make sure I\'m not misunderstanding,

is anybody suggesting that if there is a filing and an

element of it is not contested, that the Commission should

not make an independent review, but just accept it by virtue

of the fact that it\'s not contested and the lack of contest

would make it per se just and reasonable? Is that what

you\'re saying?

And if you\'re not saying that and the Commission

has to take some sort of independent review to validate the

use of it in the tariff, if we don\'t have standards such as

these, or some other way to look at these things to make a

judgment, what should we do? Because we need a basis to act

from and I at least think, as a legal matter, we probably

need to make our own independent judgment and not just rest

on the lack of contest to say that the filing is just and

reasonable as a matter of law and fact.

MR. ALLISON: You need to be careful to count the

number of negatives in any of these statements here.

(Laughter.)

MR. ALLISON: I was not suggesting that the

Commission abdicate its responsibility to make an

independent review. I was suggesting caution in how we

design the criteria, the finite nature of our wisdom about

these things, a chance to experiment, I think, will be

extremely useful in designing the criteria.

MR. STRAWN: I would echo the same sentiments.

And certainly any additional scrutiny in this area just

helps the overall concern about the market. So I\'m pleased

to have any independent review. But, at the same time,

again, I have to say it over and over again, caution,

caution, caution as we approach the heating season and the

overall markets. So, yes, I echo the same comments.

MR. MARTINEZ: One question I have is, I heard a

lot from you about the cost of implementing ‑‑ you know,

keeping track, if these criteria apply or not, of the

uncertainty it could bring, whether a particular point

satisfies it or not, but one thing I wanted to ask is if you

see at all the public benefit of it. The Commission

considers this not on a whimsical basis but because they ‑‑

you know, we think that there\'s a public benefit of it. In

this case it was the notion that if more information needs

to be made available so that contracting could be more

informed and reduce the costs of litigation, and things like

that, that one way that the Commission could nudge the

system towards having more information and by putting some

expressed requirements somewhere in its rules. And if you

think that there\'s ‑‑ and so I want to ask, do you think

that this is something worth pursuing? And if it is, how

could the Commission other than this, through processes like

this, how can the Commission put more expressly in its rules

the importance of having more information?

And the second comment I want to make is that

we\'ve gone through some crisis of liquidity of market

activity, it might have been caused, you know, lack of

confidence also credit problems and all of that. What have

we learned for the next time around? How can we set some

standards that are clear and spelled out perhaps to reduce

uncertainty of what we consider could be some thresholds?

And the criteria that we laid out, we really tried to make

them not very constraining. We tried to make them actually

a minimum, a minimum level. How can we set out some trip

wires for the next time around? Well, let\'s hope it doesn\'t

happen, but the next time around they do have problems with

low market activity, you know, what have we learned now to

set those alarm bells? And would this be a proper ‑‑ if

that is a proper public benefit, would this be a good place

to set those standards, minimum standards that would set out

alarm bells the next time around the market activity

decreases?

And the last comment I had is that Jim Allison

makes a very good point that we should never lose sight of

that. If the concern is liquidity, we don\'t have a good way

of measuring it. And it\'s difficult to define it so that we

approximate it with market activities so that there will

always be false positives, false negatives, and things like

that, where you\'re trying to measure liquidity market

activity. I always think of it as measuring somebody\'s

maturing by their age. It\'s not that there\'s really there a

connection, a correlation, but there will always be false

measurements. But it\'s just something that can be measured

quite easily, readily.

But comments about the public good and would

these be a good measure to achieve those public benefits?

MR. SANTA: I would suggest that that, by virtue

of the way you have posed the question in saying, well, we

want to be ready for the next time and what happens when

this happens, it kind of reinforces the point that I made

earlier which is that really this is driven by a reaction to

events in the marketplace that really have little to do with

pipeline cash out mechanisms and the use of indices in the

tariffs. And we concede that the pipeline tariffs are the

most readily available jurisdictional hook for the

Commission to get at this. There are others that I think

would get the Commission further out on the limb legally,

but that could be explored. But nonetheless, that\'s it.

In view of that, I think, you know, the message

that has come from the panel has been, be very careful that

in trying to fix what is another problem you don\'t upset the

workability of the cash out mechanisms which I think across

the board there is quite a bit of satisfaction with how

those mechanisms are working currently.

I think that, you know, as Bruce Henning said,

the fact that there will be more information out there as a

result of these criteria I think will, in and of itself,

will have a benefit. Even if it is not mandated that it be

applied in the context of some jurisdictional instrument, or

to the extent that you\'re going to apply it to some

jurisdictional instrument like the cash out mechanisms, that

it be done prudently and applied where there is a problem

but not in an area where quite frankly there may be no

problem and there may be one created with some unintended

consequences.

MR. HENNING: At the risk of jumping ahead and

stepping on the toes of Mike Novak who is going to speak for

AGA on the next panel, I\'ll go ahead and take the

opportunity because I think the questions that you\'re

talking about really refer to that. It\'s very clear to the

AGA member companies and to an analyst such as myself, that

the actions that the Commission has taken and the focus that

you put on the issues of liquidity and sufficient data

reporting and accurate data reporting are bearing fruit.

That the information that we have available today is of much

better quality and is really moving to reassure the

marketplace.

And, in fact, we believe you should continue to

do that. We think that you have accurately identified three

important metrics and you\'re going to have that information

going. Do those generate public goods? Absolutely. Do

they wind up improving the market transparency? Absolutely.

Will that in and of itself take ‑‑ solve a potential problem

that might exist in the future in terms of activity?

Unfortunately, no. Because the reality and it was mentioned

earlier, for business decisions, you\'re going to look at

different kinds of transactions differently and in, frankly,

during periods of high volatility you are more likely to

enter into index transactions rather than fixed price

transactions. And so you will have ebbs and flows of fixed

price transactions. I would note that that would happen

whether you had mandatory reporting or whether you had

voluntary reporting, that is still going to go up and down.

So have we generated improvements? Yes, we have.

Are things better than they were? Yes. But in trying to

deal with the jurisdictional tariff issues that are facing

the Commission here, keep pushing forward. Keep being the

bully pulpit for exchange transactions. Don\'t interfere

with the decisions of others, that might determine in some

instances you would want to enter into bilateral

transactions, but continue to do the work that you\'re doing.

MR. STRAWN: You stole my thunder just a little

bit. I had just written down \"bully pulpit\". I mean, if

nothing else, just the threat of some things that could

happen alone is encouraging people to have more reporting

and just the overall scrutiny of the Commission in general

and the recommendations that have been made is moving us in

the right direction in our opinion and in the opinion of my

member companies. So, just the scrutiny and the

encouragement of people to continue to report in the way

that they are is really milestone. And that\'s why we can

speak with such confidence about what the Commission has

done so far. But, again, if you start introducing things ‑‑

if it ain\'t broke, don\'t fix it, is what you keep hearing

over and over. And we keep saying that for a reason. And

it\'s rare that we have such universal agreement on these

types of things. It\'s not that we all love each other up

here ‑‑

(Laughter.)

MR. STRAWN: ‑‑ that\'s certainly not the case.

But it\'s rare that we have some type of consensus in an

area. So we keep pointing back saying, if there is some

consensus we are all concerned about what would happen if

you started to mitigate that in some way that we don\'t

necessarily agree on at that point. So, again, the bully

pulpit that you have has been doing a wonderful job of

moving us in the right direction. And we are herded. We

are at least moving in the right direction.

MR. HARVEY: Before we run out of time with this

panel, I would like to switch direction just a little bit.

Because one of the issues we would like to talk about, more

than half of the physical document that we produced was

actually in the form of tables of lots of numbers and that

was a deliberate attempt to get a fair amount of information

about our questionnaire out and into the hands of everyone

to educate. I happen to know that Mr. Allison has looked at

this stuff in a fair amount of detail. I don\'t know about

the remainder of you, but I certainly would invite any

response. But I would like to spend a few minutes getting

your feedback on ‑‑ we sort of expressed within our fairly

quick period of time, due to the hard work of Mr. Martinez

to my right here, among others, but we could learn from

that. We would really like to hear what you all have

learned from that information to the extent that you could

share some of that with us.

MR. ALLISON: Cut me off when I\'ve used up too

much time because I could go on for a long time on this

topic.

MR. HARVEY: Well, we do only have a few minutes

and we may have a couple of other observations.

MR. ALLISON: The data to me were strongly

confirming of the idea that people who are using the indices

are overall happy with the indices. Now, we should note

that although the most common expression of confidence was

rating it an eight, there were a small percentage of

Respondents who rated it one or two. So not everybody is as

happy with the indices as I am. But a very large proportion

did express a very high level of confidence. That is backed

up by the fact that they use indices; 92 percent of all

participants said they do in fact use indices; 62 percent of

all the volumes are in fact priced off index.

And I believe the data also show that that

confidence is properly place in the sense that the deals

that are reportable have a very high probability of

appearing in the indices. So the indices include a very

large proportion of the information from the deals that got

done that are reportable. And I think do not include deals

that did not get done.

Once upon a time, that second point was a

problem. The indices had deals that in fact were not done.

I think we have killed that problem. It is important to

continue the focus on making sure that problem does not come

back. And my company has implemented the recommendations

and we have done the audit. So we have the processes in

place to make sure that we do not have to visit the CFTC or

the FERC to explain why it is that deals that never got done

got reported.

On the positive side, the data suggests that a

very large proportion of deals that did get done that are

reportable did in fact show up in the publisher\'s data which

means that the indices are fundamentally reliable, so the

reliance that people have placed on them is, I think,

properly placed.

MR. ROZGONY: I would just say that I thought the

report chronicled very well the process of FERC and I\'ll use

the term \"shepherding\" the industry, not necessarily

bullying, but doing a great job of leading everybody to a

better solution out there. I thought it really was an

outstanding report.

There was one thing in there with regard to how

the first survey asked a question of do you report. And I

don\'t remember the exact specifics, but I thought in the

first report if you contributed to ‑‑ or if your

transactions were executed on an electronic platform, you

were considered reporting.

I believe in the second survey that you were not

considered reporting unless you submitted or you transacted

all your transactions. So there seemed like you would ‑‑

and that may not be exactly right, but that\'s the way we

kind of interpreted it at that time. But all in all, this

was an outstanding report and it was very good for the

industry. We thought you did a great job.

MR. STRAWN: Just one quick comment. I want to ‑

‑ now that we are in the mood of congratulating you ‑‑

(Laughter.)

MR. HARVEY: I didn\'t ask for congratulations.

I\'m more interested in what the numbers told you guys too.

MR. STRAWN: Unfortunately, you are going to get

more congratulations; I\'m sorry.

(Laughter.)

MR. STRAWN: I guess just the motion that just

one distinct point and that is we are the ones really using

these indexes. And just the fact that industrial consumers

are rated at 7.43 level, at the highest end of the spectrum

just reflects, and it accurately ‑‑ we just met with our

membership just last week ‑‑ and we discussed this and there

wasn\'t a great deal of debate about it. People were happy

that the report actually reflected the view of industrial

consumers. The fact that we are gaining confidence,

continue to have confidence, and I\'m on the next panel ‑‑

and just the fact that ‑‑ and just the mere threat or the

notion of a mandatory process makes us even more comfortable

with what the findings are here now and the fact that we

will ‑‑ as much as possible, continue to contribute to this

overall wealth of information.

So, again, one more time, we applaud the depth

and the magnitude and just the overall investigation of the

report. Because, again, just the overall scrutiny to the

overall industry, I think, helps the whole process and

reduces volatility. The more scrutiny, less likely you have

some things that might be classified as nefarious happening

in the future.

MR. HENNING: I think what the report did was it

provided at the snapshot as to where we are now. And

probably the best thing in terms of reaction to it is to

recognize that there was a period of time when gas supply

people and local distribution companies would look at the

index values and scratch their head, we wonder how that

could possibly be given their knowledge in the marketplace.

They don\'t do that now. They look at it and they say, yep,

that\'s right. It\'s not the issue that it was and it\'s in

part because of all the actions taken by the Commission and

the actions taken by the industry.

I think that was reflected, you know, in overall

seven out of ten. Could it be eight? Maybe. When I\'m

sitting and looking at my son\'s grades on a curve, 70th

percentile looks pretty darned good to me. It\'s seven out

of ten is not a C. It\'s up there in that B, B plus level.

And I think that\'s where we are and that\'s what we feel

about the reaction to the overall levels.

MR. GERARDEN: Don Santa made some comments on

the difference between the use and tariffs and the

commercial uses. And Jim Allison has pointed out that 62

percent of transactions are using indices on the commercial

side. In tariffs we see the index use in the tariff side.

We don\'t see what indices are being used in commercial

transactions. If the staff recommendation were to be acted

on by the Commission, the Commission were to impose some

minimum criteria for an index to be used in tariffs, would

that have an adverse effect on those index points as they\'re

used in commercial transactions?

MR. ALLISON: I would not expect it to. If it had

the effect of the index point failing the test established

by the criteria, that might have an adverse effect on the

availability of that index for other commercial purposes and

that\'s partly what I was worried about when I was talking

about the false negatives earlier. But I don\'t think other

than repeating that concern, I don\'t know that there\'s any

reason to be worried about an adverse spillover effect on

the commercial side from the way these might be used in the

cash out.

MR. HEDERMAN: Thank you very much. This has

been helpful. We plan to get going on panel two in about

five minutes. So, take a quick break, but don\'t go far.

(Brief recess taken at 10:35 a.m.)

MR. HEDERMAN: I want to a quick moment before we

move on to the next panel discussion. Our colleague, Mike

Gorham from that CFTC who has worked very nicely with us

since I joined the Commission, is leaving the CFTC to head

back to Chicago and head the Center for Financial Markets at

the Illinois Institute of Technology and wanted to present

him with all the powers vested in me being an honorary

energy market monitor.

(Laughter.)

MR. HEDERMAN: So, here you go, Mike.

(Applause.)

(Photo taking.)

MR. GORHAM: Bill, thank you. Actually, I had no

idea I was going to get a present in coming today. And

actually I didn\'t get a chance to say something in the

beginning, I wanted to say that one of the things I\'m going

to miss, I\'m going to actually be leaving next week. One of

the things I\'m going to really miss is the incredible

public‑spirited cooperation between FERC and CFTC and I\'ve

loved every minute of participating in that. And I think

the kind of thing that you guys are doing here and I love

the kind of ‑‑ I can\'t remember when we\'ve had feedback like

that where you would have a whole panel of industry experts

that love what you\'ve been doing.

(Laughter.)

MR. GORHAM: And it\'s very nice to hear.

MR. HEDERMAN: I\'m sure we can fix that.

(Laughter.)

MR. HEDERMAN: I\'m glad to see Mr. Strawn back

for this panel. We had questions that, again, compare and

contrast will be useful.

Steve, do you want ‑‑

MR. HARVEY: We like to keep things moving in our

conferences. And so let\'s start with Mr. Nauman.

MR. NAUMAN: Thank you. My name is Scott Nauman.

I am the gas marketing manager for ExxonMobil covering both

North and South America. Today I\'m here representing the

Natural Gas Supply Association which, as I\'m sure you know,

represents both integrated and independent producers and

marketers of gas. I think that is significant from the

standpoint that the organization that I represent and the

member companies have been very active in the industry

development of price reporting standards. And as the Staff

Report shows have also been in a leadership role in terms of

actual reporting all of our data.

I will keep my comments brief in that I look

forward to the Q&A section of this. I think that is

important.

I would start by saying appreciate the

opportunity to be here.

A lot of the discussion on price reporting

circles around the term \"confidence\" and confidence by its

nature is a subjective term. As I look at the data from the

Staff Report I find a couple things that jump out. I think

the most compelling piece of information, it\'s been noted

before, is that given free choice over 90 percent of the

respondents indicated that they do in fact use indices,

physical indices, for their gas transactions. Certainly we

do, those in and membership of the NGSA do.

If you go down the scale and look at on the one

to 10 basis what do people think as noted in our comments

that were submitted the glass is half full. The vast

majority scored five or higher on their level of confidence.

Over two‑thirds scored it seven or higher and you have heard

that before.

I can tell you from personal experience in

filling out the survey one of the things that I would note

is that question of confidence was asked of the market as a

whole. That includes highly liquid points, that also

includes some what I would call, more outlier points. I

suspect if you asked the same question with respect to the

top 10 or 20 points you get even higher scores.

Again it\'s subjective, but I view the responses

from the people that had input to be very positive.

With respect to the Staff Report, I and the

association that I represent concur with many of the

statements in there. Quality of reporting has improved.

Clearly the quantity of reporting has improved. The data

provided by the index publishers has improved. As I

mentioned, the competence level continues to increase.

One area, and I have submitted an addendum to our

comments that have a series of graphs and some analytics

behind this, but one of the things I noted in looking at the

voluminous data, and that I think should be stressed is the

need to look at the results on a volume‑weighted basis. And

I will start by saying that every respondent is important.

The Commission threw out a very large net and that is

important. It is important not just to talk to the

ExxonMobils of the world, but it is important to talk to the

smallest LDC out in the heartland. But when you look at the

results one of the things that I think was intuitive to me

was that it would be likely that the smaller entities were

less inclined to report.

I will offer from anecdotal evidence in meetings

like the one in Kennesaw, Georgia, one of the things we

learned was, either because it was burdensome to the smaller

entities, they felt that larger entities were reporting and

so they were covered. So I was not surprised when in every

category producers, marketers, LDCs, industrials, those that

report, tended to be bigger than those that do not. That\'s

no surprise.

And so I think the data needs to be looked at

from that frame of reference. I\'d much rather have the top

20 out of 300 reporting regularly than worrying about the

last 280 to 300, and we viewed the results that way.

I guess I would close with our view is that the

Commission should continue to pursue the path that it has.

I think the policy statement has had a significant effect.

As I mentioned before, quantity and quality seem to be up in

reporting. I think for some of us, the policy statement

reaffirmed what we already knew. For some it provided a

roadmap for where to go. But at least it puts us all on the

same footing.

I think the responses to level of confidence

reflect a very positive outcome from the work that\'s been

done and I would encourage that to continue. As I said, I

look forward to your Q&A\'s.

MR. HARVEY: Thank you very much.

Mr. Wilson.

MR. WILSON: Good morning. My name is Nathan

Wilson. I am with Conectiv Energy Supply Inc. I am here

today on behalf of the Electric Power Supply Association of

which Conectiv is a member.

EPSA\'s members account for nearly 40 percent of

the installed generating capacity in the United States. As

large buyers of natural gas and sellers of electricity, EPSA

members rely on indices for price discovery and risk

management and have supported the Commission\'s efforts to

encourage voluntary price weight.

It is our belief at EPSA that one, market

liquidity has increased over the last two years as evidenced

in the Staff Report. And two, the quality of indices has

greatly improved due to the Commission\'s initiatives.

Three, the Commission\'s actions and the

industry\'s responses have obviated the need for further

Commission action on price reporting and indices.

And, four, the best way for the Commission to

improve price transparency and promote competition in the

wholesale electric markets is to continue its efforts to

establish regional organized markets.

I would like to briefly iterate some facts

underlying these positions. First, there has been a quick

and substantial industry action to improve the quality of

published indices and market transparency. The speedy

formation of the Market Price Reporting Action Committee

which was an ad hoc industry group of more than 35 energy

industry organizations including energy companies,

exchanges, brokers, industrial end users and price index

publishers, that effort should be construed as an indication

that the energy industry takes the Commission\'s efforts in

this area very seriously.

The Market Price Reporting Action Committee,

which I\'ll refer to as \"MPRAC\" successfully met its

objectives to aid the Commission in understanding the

quality and depth of reporting data, and in assessing

barriers or weaknesses in price reporting. MPRAC\'s efforts

showed that both market liquidity and reporting had

increased and that the markets confidence in indices has

also increased.

The Commission\'s March survey validated the MPRAC

results, but noted the perceived absence of a majority of

reportable transactions.

MPRAC was able to shed some light on the latter

issue by identifying a methodology assumption and explaining

some of the low reporting results in the staff survey. The

MPRAC work concluded that approximately 75 percent of all

reportable day‑ahead and bid‑week natural gas volumes are

being captured in indices.

To make the story even better, the Commission\'s

March survey results indicated that some market participants

not currently reporting said that they will soon begin

reporting to index publishers. So to summarize the

reporting of price forming transactions has improved and we

should expect it to continue to improve.

EPSA supports the efforts of the Commission to

promote voluntary price reporting. The Commission\'s policy

statement issued last summer and the market behavior rules

provide sufficient structural and behavioral safeguards

against behavioral irregularities. These rules are adequate

to deter future behavior that may undermine confidence in

the natural gas and electric markets. The market behavior

rules have provided clear guidance to the industry and help

to establish best practices for internal company controls.

Certainly with the issuance of the policy

statement, the behavior rules and the surveys to the market

participants the Commission has not been idly standing by.

The activity of the Commission to date has been commendable.

Further specific and overly prescriptive actions such as

mandated reporting are not necessary.

The natural gas industry especially is

inefficient and in a competitive market certainly not in

need of structural changes that require Commission action.

Rather than focusing on price reporting and indices as a

means of improving the electricity market, EPSA would

encourage the Commission to improve the transparency and

liquidity of this market by continuing its efforts to

further develop regional transmission organizations

nationwide.

RTOs inherently produce the transparent

information that market participants need to make reliable

choices. EPSA supports the Commission\'s actions taken to

correct market irregularities associated with price

reporting and indices. The Commission has taken sufficient

action on these issues. The Commission should accept the

progress reported to date on price reporting and should

focus on promoting voluntary price reporting and organized

markets.

Thank you.

MR. HARVEY: Thank you very much, Mr. Wilson.

I will go to Mr. Novak.

MR. NOVAK: Good morning. My name is Michael

Novak. I\'m assistant general manager of Federal Regulatory

Affairs with National Fuel Gs Distribution Corporation.

On behalf of AGA, we would like to say that we

think the industry has made very good progress under the

policy statement. The industry report confidence levels,

seven out of ten is an acknowledgement of increased

satisfaction or progress. There is no general outcry in the

industry that published indices are inaccurate today. That

is not reflective of the market value of gas. Rather the

general consensus is that we turn the corner.

This doesn\'t mean that we\'re done, however. But

on the other hand we shouldn\'t consider changing course. We

highly are in support of continuing the voluntary efforts

for reporting. We don\'t see the need to move to a mandated

option at this point.

For these reasons we feel that FERC should

continue to focus attention on the issue. Essentially the

Commission should continue its monitoring role. And look

forward to the questions and answers and providing more

detail.

Thank you very much.

MR. HARVEY: Thank you, Mr. Novak.

Mr. Weaver.

MR. WEAVER: Good morning. I am Alonzo Weaver.

I am the vice president of Operation for Memphis Light Gas

and Water. I am here on behalf of the American Public Gas

Association.

APGA is a national nonprofit association of

publicly owned natural gas distribution systems with over

600 members in 36 states. We are publicly owned gas systems

that are not for profit. We are retail distribution

entities that are owned by and accountable to the citizens

that we serve.

MLGW is a large company that is a member of APGA.

We have about 45 BCF that we flow through our system

annually. We have a peak day of around 650,000 MMBtus. I

have a staff that does a lot of the gas purchasing for MLGW.

It\'s a staff of about three people that actually do the

purchasing itself. We use the indexes quite a bit in

purchasing our natural gas. We buy mostly index gas. In

fact, we buy all index gas when they post. When it doesn\'t

post, then we lock in our bases using the NYMEX futures

close. So the indexes are important to us. They are very

important to us even though we are a large company.

Now, we have a lot of resources. Most of the

APGA companies do not have those sort of resources. And

about 500 of our systems are smaller systems with very few

customers and they don\'t have a larger staff like ours to do

their purchasing. So indexes are very important to them as

well.

So, therefore, APGA has taken a position and we

still maintain our position that mandatory reporting is

necessary.

We see the price reporting system as being one

that is broken. It has improved through the past two years,

but it is still not fixed. It\'s a broken system that\'s not

fixed yet.

We like to see all market participants to

participate in this report, that counterparty information be

included, that it should report to an independent hub and

the hub doesn\'t have a commercial venture. FERC should have

oversight over the hub, but shouldn\'t run its day‑to‑day

operations. The public and the publisher should be able to

access the data when they need to.

We will support this position because we want

what a lot of others have stated that they want, a market of

integrity and liquidity, and we believe that this is the way

to get to it.

APGA members rely on price indices for the vast

majority of their gas purchases, as I stated before.

Unfortunately, the voluntary system has failed in getting

all the market participants to report. It is a selective

process. Some report, some do not.

So it still leaves the question of whether or not

there is manipulation. So in order for us to have

integrity, we like to see mandatory reporting.

Thank you very much.

MR. HARVEY: Thank you, Mr. Weaver.

Mr. Walker.

MR. WALKER: Yes. I am Jeff Walker and I am the

chief risk officer for ACES Power Marketing who acts as a

transaction agent for its 14 member owners who are

cooperative, load‑serving power supply entities. And these

entities consume a lot of gas for their generation and are

primarily in the wholesale power market.

ACES Power Marketing rarely execute power

transactions at an index price. However, about three‑

quarters of our gas transactions settle at an index at

various locations. And I\'d like to qualify my comments

today that my views expressed today represent the views of

ACES Power Marketing, not necessarily under ECA with its

large and diverse membership of distribution coops and

electric consumers. So my views are those of a practitioner

for a subset of NRECA\'s members.

We believe that the keys to industry confidence

and market transparency are liquidity, good process, and

adequate disclosures with published indices. Have we turned

the corner on improvement? Yes, we believe we have.

The first two keys that I mentioned which were

liquidity and good process, take time. First it takes time

to recover market participation by those who transact. And

it takes time to implement good process and to participate

voluntarily. For example, the 14th member that permitted us

to do price reporting allowed us to start doing that in late

May. The other ones already had been doing it for some

time.

So it took them a while to get comfortable with

the confidentiality process, the internal control process,

and the idea that they were going to be disclosing sensitive

information to index developers.

From the standpoint of index developers, we

believe that they need to adequately disclose information to

further restore confidence. We believe that there need to

be well‑defined locations.

In other words, what physical control area

delivery locations are rolled up together in each index

location. They need to report volumes by location. They

need to report the quantity of transactions making up that

volume, and the number of transacting entities. There needs

to be a clear indication if they provide subjective price

views as opposed to data that comes from transactions, and

obviously they need to disclose what their methodology is

for deriving price indices.

Obviously it would be nice if they would all have

a common methodology, but I\'m not going to hold my breath on

that one.

In the meantime, ACES Power Marketing avoids

executing index price transactions at low volume locations.

Instead what we do is use highly correlated locations that

have higher volume that we can rely upon more. Overall we

believe that the Commission should continue to encourage

voluntary participation of price reporting. We believe that

the Commission should continue to encourage compliance with

the policy statement and the requirements and guidelines of

that statement. We believe that these requirements and

guidelines are adequate for good process, both for price

reporters and index developers.

Mandatory reporting in our view does not capture

for sales of gas in other nonjurisdictional activities.

It\'s more important to get reporting by substantial

participants with significant volumes. We believe that

mandatory reporting would increase quantity, but not

necessarily quality. Those who choose to participate

voluntarily now will probably only do so if they have good

process in place and are complying with the policy

statement. If you impose mandatory reporting, everybody

will participate, but that does not mean that they will have

good controls or good process. So while it may improve

quantity, I don\'t believe it will necessarily improve

quality.

Unlike endorsing an electronic platform as the

end‑all, be‑all kind of reporting solution that was

suggested at least by one individual on the prior panel, we

believe that a robust, competitive market environment is our

traders talking to bilateral counterparties. Our traders

also listening to broker squawk boxes, and our traders

watching the ICE screen and any other electronic trading

platform that is available all at the same time and

transacting to the economic benefit of our member owners

wherever the best mechanism for that is.

Our confidence comes ‑‑ improved confidence comes

from the fact that when we see price indices it does reflect

the transaction prices we are seeing in the market when we

transact to fixed prices.

Thank you.

MR. HARVEY: Thank you, Mr. Walker.

MR. Musur.

MR. MUSUR: Good morning. My name is Al Musur.

I am the director of energy and utility programs for Abbott

Laboratories, but I am here today representing the

Industrial Energy Consumers of America as the chairman of

the group.

The IECA is a group of manufacturing companies.

Our members purchase in excess of \$10 billion in energy

annually and have sales approaching \$400 billion. More

importantly, we tend to be energy intensive industries and

where energy and its costs can have a huge impact on our

competitiveness.

Our members represent plastic, cement, food,

paper, food processing, chemicals, fertilizer, insulation,

steel, glass, industrial gases, pharmaceutical and brewing.

So we cover a very broad range of industrials in the United

States.

It has been our position and still is our

position that we favor mandatory reporting of all natural

gas transactions to a single third party that can make the

raw data available to all. We would suggest that the FERC

provide oversight of the process. The counterparty

transaction data must be provided for that oversight

function to work properly. And that all counterparty data

must be and remain confidential to make the system work at

all.

In your survey our members are the ones and twos.

You know, we have low confidence in those institutions. I

think it\'s a fallacy to believe that because people use

indices they have confidence in them. People use indices

because that\'s all there is to use in some cases. You know,

we wind up with a problem that we the consumer who don\'t

live in the market as the rest of these people do every day,

every minute, you know, if we need to know a price, we have

a choice, pick up a phone and call a marketer and say,

what\'s the price? And he says, \"it\'s \$6, trust me\" or you

go to an index and it says it\'s \$6, trust me. Right now

we\'re not sure we can trust either.

We have been asked as an organization why we

believe that natural gas is so special a commodity. And it

should require some kind of special handling like a

mandatory reporting system. We think there are already four

things that kind of distinguish natural gas. One of them is

for the consumer natural gas has no substitute. Natural gas

is used as both a feed stock and as a fuel. And as a feed

stock, the chemistry doesn\'t allow anything else.

That will make it a particular product, there are

probably more chemical pathways than one to get there. But

if yours is natural gas and it becomes unavailable without

rebuilding entirely, you\'re out of the business.

As a fuel, all of us under the Clean Air Act are

pretty much limited as to what we can burn. Most of us have

got other fuels as back up for natural gas. But our permits

are restricted. We can\'t burn them all year long. We\'ll

get a couple hundred hours of operation with a secondary

fuel, but if we don\'t have natural gas, we\'re not in

business.

The second thing is, the only delivery mechanism

available to us to get the natural gas so we can burn it is

through monopoly transmission and distribution systems. You

know, if I were buying anything else, I could get a barge

loader, a truck loader, or a boat load and I have some

choices as how I want to get it and when I want to get it

and how it\'s going to be handled. In this business, it

comes the way it always comes, it gets pushed into a pipe

and then through an LDC and then to me and there are no

choices in that.

My business is just outside of Chicago. Chicago

has probably every major gas transmission pipeline coming

into a hub in Joliet. Unfortunately, I\'m north of Chicago

and there\'s one pipeline that serves us. It\'s already

constrained and because of other reasons it will never be

relieved. And so it\'s a problem for me. Because the fact

that I have no choice even among pipelines becomes

constraining. The system is different. Natural gas is a

flow‑based system. You know, whether I arrange for the

transmission and delivery of gas or not, I can still suck

gas out of the pipe and I\'ll still get a bill from somebody.

So I can go into the market and I can buy futures

on the NYMEX and I can have gas delivered to the Henry hub,

and I can make arrangements with a gas pipeline and deliver

it to my LDC. I can go to a marketer and ask them basically

to do the same thing and price the gas off an index.

I can go to my LDC and say I want to buy tariff

gas, you do all that work for me. Or I can lean on the

system and just take gas, and as long as there\'s a meter

there somebody will send me a bill because there\'s a tariff

someplace that tells them how much. It\'s sort of an after‑

the‑fact kind of a business. We are going to consume the

gas and everybody knows we\'re going to consume the gas and

unless somebody comes out and shuts off a valve, that gas

will be consumed. The only question we have to answer is,

at what price was it consumed?

And so what we have to do is make sure the

pricing mechanisms that we\'re using for that are as accurate

and transparent an liquid as we can get.

The reason that we\'re using indices is because

historically that\'s the way that the system developed. You

know, I can go out and buy 90 percent of my gas to hedge the

price, but day to day, I don\'t know how much gas we\'re going

to consume until that day occurs. Now, if I have to go into

the market to get some, the most convenient way to do it is

by an index. I can call up my broker and say, this much gas

today, tomorrow, the end of the week, and we\'re going to

pay, you know, whatever the Houston ship channel is plus or

minus something. And we have something that we had

confidence in was an average price. I\'m not looking for the

most, I\'m looking ‑‑ or the least, I\'m looking for what the

market price was.

I don\'t understand why a consumer would want

everybody who is in the gas business to be reporting prices.

I don\'t know why we would want an index that represents less

than the whole. Because we don\'t know if that\'s the high

end of the bell curve, or the low end of the bell curve, it

would be much better for all of us if we had all of the data

and it was available to everybody. And then from there we

could make some reasonable decisions.

I appreciate all the work that the Commission is

doing, the Commission staff. I think this is a tremendous

undertaking. I\'m glad that all of the people in the

industries, the marketers and the pipelines and that are

happy with the system the way it is. But as a customer, I

don\'t think it works very well.

MR. HARVEY: Thank you, Mr. Musur.

Mr. Strawn.

MR. STRAWN: I\'m Alex Strawn. Employee of

Proctor & Gamble, and I oversee the physical contracting of

gas for all of Proctor & Gamble\'s facilities and sites in

North America. Today I am representing the Process Gas

Consumers Group as chairman and my remarks should be taken

from that context.

Again, Process Gas Consumers are a trade

association of industrial gas companies who require natural

gas, also as a feedstock and in use in their key operations.

We also represent a broad cross‑section of American

industry, both geographically and in terms of the products

produced. We employ more than a million and a half people

nationwide and affect the lives of many consumers as a

result of that direct employment. We also use more than

half a TCF of gas annually. In general Process Gas

Consumers try to promote a coordinated, rational, and

consistent federal and state policy movement in relation to

natural gas supply and transportation.

I really appreciate the opportunity to speak on

this panel in regard to this issue for which we have a

substantial stake. Although I will say for the benefit of

this panel that our position remains unchanged. We

vehemently oppose mandatory price reporting. We have a

current confidence in the data integrity of the current

price indices and we believe that previously they may have

been undermined by the inappropriate action of a few gas

traders. We violently oppose any attempt at market

manipulation by these parties or any other parties. We

believe that the government should penalize these types of

abuses and the abusers.

However, we support the use of free market price

reporting systems, plural, as the most effective way of

providing industry with price transparency at the supply and

market area hubs.

We believe the Commission should focus on how to

improve the credibility of existing price reporting systems

rather than how to design an entirely new system which I\'ve

said previously would possibly add to the uncertainty of the

overall markets, particularly in gas.

We have so many concerns in the supply/demand

equation from an industrial point of view, adding this level

of uncertainty just heightens our concern about the overall

market.

We believe mandatory reporting is an unnecessary

step that would add additional costs to my member companies

both large and small. In fact, we believe you might have

the reverse effect of actually having less reporting by the

companies that are involved and more reliance on the index

itself. Fewer fixed‑price deals.

The case really has not been made to require

nonjursidictional parties to be required to divulge the

tales of private contracts. And from an industrial point of

view, we have enormous competitive concerns on how that

information might be divulged, even with confidentiality

agreements in place with the reporting agencies.

At a minimum FERC should continue to play an

active surveillance role and use a bully pulpit to move

people to more active reporting at all times.

There is no need for a single data collector, or

an index provider. FERC does not need to pick a winner in

this contest. Competition is vital and must be allowed to

flourish through multiple data collection agencies and index

providers.

Again, adding a new system, creating a new

system, adds uncertainty to an already, sometimes uncertain

market.

A few interesting points from the May 5th Staff

Report in our opinion. Industrial ‑‑ industrial consumers,

people that I represent are the greatest users of these

indices. We also have the highest level of confidence in

these indices. And we also represent one of the largest

reporting segments of these indices, second only to

producers.

And the steps that FERC has taken to date are

more than sufficient in our opinion to restore confidence in

the indices. The policy statement, great job, the safe

harbor, and the periodic surveys as well.

Options for future Commission actions should

include continued monitoring and vigorous monitoring of the

current situation. And although significant progress has

been made, PGC is confident in the indices and continued

monitoring by FERC would help even more.

And lastly, and most vehemently, mandatory

reporting is completely unnecessary and PGC does not believe

that it would substantively improve the indices. In fact,

more than likely you would have the opposite effect, less

reporting overall by our member companies.

Thank you. I look forward to your questions.

MR. HEDERMAN: Thank you. We expected that this

panel would be one where we could get more contrast and

opinions and you have not disappointed. I think we\'ll work

through the list of points because I think it\'s real

important to understand the basis for the different

positions. And I would like to start with the point about

one data hub chosen by, I presume, the Commission, would be

your idea, Mr. Musur? Or do you have the industry coming to

consensus to develop that monopoly data hub system?

MR. MUSUR: The first time we had proposed this

we had suggested that somebody like the EIA who is already

doing data collection just collect all the data. You know,

the University of Houston with their hub concept, I don\'t

think we have a position on that other than the fact, you

know, everybody does so much reporting with the government

now. There are mechanisms within the federal government of

keeping things confidential.

Every year all of us are filling out reports for

the Census Bureau on Energy that we consume and how much

coal and how much this and that. And they tell you, you

know, we can\'t guarantee that this is going to be

confidential, but it hasn\'t been a problem. So people

continue to do it and don\'t complain about it.

This is not the first commodity to see this. The

U.S. Department of Agriculture proposed rules for mandatory

reporting for livestock prices and it just went into effect

in 2001. And their reason for doing that was to make

markets more transparent and to offer new market information

with respect to pricing, contracting for purchase and supply

and demand conditions.

I mean, it\'s the same thing there as it is here

and it worked fine. That\'s also an industry where people

are using the indices to determine price for the commodity.

And it\'s worked great. You know, nothing changes if nothing

changes. And if we\'re going to sit around here and say

everything is fine, just because today we don\'t have a

problem, I\'m not sure that that\'s a solution.

There\'s constraints on natural gas today that we

had never had in the past. You know, we\'ve got the mercury

mat coming down like that, the Interstate Air Quality Rule

that\'s going to push more utilities from coal to gas.

There\'s going to be more competition in the marketplace for

that. There will be more volatility unless we have

transparent and liquid pricing points because they tend to

mitigate the volatility of those markets.

You know, in the last ten years, from 1992 to

2002, the natural gas demand for the electric power industry

went up 60.5 percent, accounting for 63.6 percent of total

increase in U.S. demand over that period of time. That\'s

not going to change. There\'s going to be more pressure, not

less. And we really believe that if we are going to do this

right, let\'s get the pricing right, that\'s going to require

some mandatory reporting to do that.

MR. HEDERMAN: I\'m sure you\'re familiar with the

EIA\'s experience with storage data reporting. Do you have

any concerns about timeliness and so forth if EIA were to

pick up?

MR. MUSUR: We have problems with the voluntary

nature of the reporting. You know, if the report is

mandatory and there are rules for when people report and

they understand there are consequences for not reporting,

they will report.

You take a look at this, you know we had a little

rock thrown into a puddle, you know, a couple of traders who

did something. In an industry suddenly the heavy hand of

government is going to come down and boy it snaps to and it

starts cleaning up it\'s house and says, \"you can trust us

now\". I\'m not sure consumers are ready to make that leap of

faith yet.

MR. HEDERMAN: No, there\'s nothing like the

threat of help from Washington to get the fear of God.

(Laughter.)

MR. STRAWN: May I make a comment?

MR. HEDERMAN: Mr. Strawn.

MR. STRAWN: I guess let me address a couple of

points that you have raised. The EIA, yes, we\'ve switched

some reporting on storage numbers to EIA and I would be one

of the first people to say that there were a few bumps in

that process. In fact, there might still be a few bumps.

And those bumps, in some cases, have contributed to a little

bit of volatility. But that doesn\'t mean that it\'s an

imperfect system. It\'s getting better each week, but it\'s

taking time to get there. Since that time, there\'s a lot

more volatility in the overall market.

And, again, when we start talking about new

systems of single approach to reporting data, you\'re going

to heighten that volatility on top of an already, in some

cases, still evolving system of EIA reporters. So I really

challenge the notion that mandatory report is going to add

to the quality of the data. Because if nothing else, more

industrial consumers would simply go to the index. There

will not be more fixed reporting, fixed price reporting.

In addition to that, I guess in terms of the

confidentiality issue, yes, a large number of our members

already report in a variety of ways to other government

agencies. Many of us have cogent operations, and adding

that additional burden of mandatory reporting is on

companies that are already stretched at the edge of

competitiveness is something we would not welcome. It\'s not

in any way that we want to shield or avoid the aspect of

more fertile reporting. It\'s just that we\'re already

burdened across the board.

And just the notion that you have more broad

reporting and the possibility of leaks of information even

with confidentiality, scares a lot of the industrial

consumers. And it scares them because every day we\'re out

in a very competitive marketplace. And just the hint of

data ‑‑ just the hint of data about one counterparty or what

deal we may be doing, the market ‑‑ and I mean, the stock

market and the market at large can infer certain nuances

about the way we are doing business. And believe it or not,

I do care about saying for Proctor and Gamble what Kimberly

Clarke does and for other companies. We are very concerned

about what happens. And in no way am I trying to say that

confidentiality wouldn\'t be respected. But things happen.

Small things happen, nuances happen. Mandatory reporting to

a single entity for which we may or may not have input in

its design would frighten us in terms of how this reporting

would be maintained and the overall integrity. We like the

system of competitive reporting because, if nothing else, we

always have a to and fro between the parties that are

involved. And there\'s a possibility of evolution of those

parties. Thank you.

MR. MUSUR: We are not suggesting that the EIA

take on the responsibility of doing all of the index

reporting. We are talking about them doing is collecting

the data with counterparty data so that it can be at least

challenged to make sure that it\'s good data. And let those

who report, report. Who knows, we may wind up with a whole

new system of even more useful indices that flow from this

when everybody gets to see all of the numbers.

MR. HEDERMAN: Thank you.

MR. NAUMAN: If I could. It\'s interesting Mr.

Strawn and I today are sitting at opposite ends of this

table. We represent opposite ends of the spectrum. I\'m a

supplier, he\'s a consumer. We have a few things in common.

One of the things we have in common is all of the responding

producers use indices. All the responding industrials use

indices. I concur with everything Mr. Strawn just said

about the down side to mandatory reporting. Some things are

clear that it will and won\'t do. It will not improve the

integrity of the indices. That\'s a fallacy. It will not

improve transparency.

I agree with Mr. Strawn, it will decrease the

amount of reporting. When we have industry meetings whether

they\'re suppliers or consumers, there are people out there

that say, if you try to force me, I just want to do fixed‑

price deals. I\'ll be what we call a \"free rider.\" And what

I find is oftentimes those that call for mandatory reporting

are free riders. There are those that use the indices,

don\'t contribute to the system. A couple of things are for

sure. It\'s going to cost more.

And one thing that\'s for sure is it goes against

free‑market principal. I\'m a firm believer, my company is a

firm believer, the association I represent is a firm

believer in letting the market decide what it wants, letting

the market decide what it needs. We\'ve all got choices.

I\'ll represent my own company. Essentially all of the gas

that we sell we have the option of selling at a fixed price,

we have the option of selling it against the NYMEX futures

contract, we have the option of using any of a number of

indices. And if they are not liquid enough for us, we can

move to the next one. And what determines which one we use

is typically the bilateral discussion we have with the

customer and coming to common ground and what we want to

use.

The last thing that I hear from both my side of

the chain and from the people that we deal with in the

consuming side is that they want to be compelled to do

something in a certain way without letting the market decide

what is really needed.

So I will echo Mr. Strawn\'s comments, but echo it

from the supply side of this, that mandatory reporting

strikes me as just wrong‑headed in this instance.

MR. HARVEY: I would like to ask a sort of

different question of everyone here really. The last two

years or so have seen a lot of changes in the approaches to

reporting, kind of talked about a lot of that. It\'s also

overall, I think, seen a fairly dramatic change in price

levels for natural gas and expectations around those price

levels for natural gas. It\'s an issue that plays here, I

think, to a certain degree in terms of the importance of

confidence.

Each of you in a way, we know from the

questionnaire, represents a piece of the industry that makes

a lot of use of index pricing and has for a while, in many

cases in your individual statements here individual

companies make a great deal of use of indices.

Have you done anything in your experience over

the last two years differently in terms of the way you

approach the market as buyers or sellers, in effect

consumers of price information based on those two different

things, a sort of change in level, a sort of ratcheting up

maybe of the seriousness of what a price actually means

here, and the struggle of working through confidence and

coming out at different levels. Do you contract

differently? Do you enter the market differently? Do you

think about these issues differently than you might have in

late 2000 before when the ripples just started from the

recognition of issues. Or, are things pretty much the same

ad we\'re just ‑‑ you know, we\'re working through this on the

side?

MR. NOVAK: Speaking on behalf of National Fuel

and not the American Gas Association, we recognize that it\'s

important to do fixed price deals in order to make the

system work. So that any tendency that there might be over

time in response to pricing signals to do more index work,

we have to take some pause and reconsider, you know, whether

that\'s good for reporting prices, whether that\'s good for

the overall objective and we need to communicate this to our

state regulators. It\'s a big system, it\'s much simpler than

just ‑‑ I mean, it\'s much more complex than just saying, you

know, what\'s the best price.

MR. HARVEY: But for example to follow‑up because

I think the state regulatory issues are interesting ones

here in the overall price dynamic. You know, there\'s a

certain amount of effort in terms of justifying and

explaining any pricing. Certainly index pricing, the use of

indices basically is a strategy for basically a set of

benchmarks, I guess, for arguing for very short‑term kind of

pricing. Have you seen interest in ‑‑ you know, where as

going into a longer‑term market has other sort of

justifications around it that take a different approach and

can take a little bit of work to the extent that regulators

are or aren\'t comfortable with that. Have you seen this

pattern shifting at all? Are they pretty much the same as

what they were two years ago? And do these issues of

changing price level and of sort of changing levels of

confidence in the prices themselves, have they played in

those kind of decisions?

You guys have a great deal, in effect, my sense

is you all have a great deal at stake in the confidences of

these price indices.

MR. NOVAK: The indices have this appearance of

being safe because you ‑‑ if you believe that they are the

market then you\'re at market and you\'re not taking a risk of

being above market.

But, it probably varies from company to company.

We hold a significant amount of storage. We can look at

longer terms, we can look at fixed price margins, look at

the strip and take risks, maybe in determining the strategy

that other companies who don\'t have some more assets can\'t,

so it\'s difficult to come up with one answer.

MR. WEAVER: Speaking on behalf of my company,

and experience that we\'ve had, we did change our buying

strategy to some extent. We started using more financial

instruments to lock in our prices. But still going with the

index pricing in order to make sure that we got delivered

gas, the deliverability issue of gas. We didn\'t want a

situation where the marketer will say, well, your cheap gas

didn\'t show up that day. So we want to make sure we had

that guarantee and then went into fixing the prices using

hedging activities.

MR. HARVEY: Now, you also, I believe, mentioned

you use some basis swaps to lock in some of those

relationships?

MR. WEAVER: Yes, we do.

MR. HARVEY: Now, those it would seem to me are

explicitly based on differences between indices. I mean,

ultimately the swaps themselves wouldn\'t necessarily equal

that, but they would be based on experience of differences

between indices?

MR. WEAVER: Right.

MR. HARVEY: But your analysis has gotten you

more comfortable with that as an approach, so presumably

you\'re move to a more liquid market in order to buy on an

index basis and using that basis to get to your location?

MR. WEAVER: We use that when we ‑‑ when our

location does not post. When there is not enough liquidity

at that particular location, so then we move to the basis.

MR. HARVEY: So let me see if this is the right

interpretation. So in effect, the concerns you might have

had about liquidity at your location you resolved by locking

at a different still location that you\'ve got more

confidence in? And that would be different probably than

you were doing two years ago?

MR. WEAVER: But overall it\'s still not a good

situation for us.

MR. HARVEY: Right. You\'re still depending on

that difference; exactly.

MR. NAUMAN: A couple of observations. And I

guess the first one I would make, I see more than just the

U.S. market in my job and I\'m struck by the fact that

sometimes we loose sight of the fact that the U.S. market is

by far the most dynamic, most liquid, most transparent

market there is. It is a decidedly short‑term market in the

global context. Your question as to, is the market

different in the last couple of years, not appreciably. It

is still a decidedly short‑term market. We\'re the second

largest producer in the U.S. We\'re top ten marketer. The

vast majority of our gas, and this is no trade secret, the

vast majority of our gas is sold either in the daily, the

monthly, or the seasonal market. There\'s very little of

that gas sold longer term than that. So by global standards

that\'s a short‑term market. Has that changed? Not a lot.

It\'s probably no secret that there is more interest these

days in discussions about LNG. Those tend to be longer‑term

discussion but that\'s a dance that\'s just staring at the

periphery at this point. So the market we live in today is

short‑term.

You asked the question about individual

companies, have we changed. That I would say largely, no.

We\'ve always reported. We\'ve had ‑‑ anyone that knows us

would know we have lots of control, so we\'ve always had lots

of controls over our reporting.

We, to give you an insight into how the business

runs in our shop, every month we have a marketing meeting

shortly before bid week. That\'s the early part of this

week, in the case for July. I encourage our marketers of

gas to do some level of fixed price deal making. That is to

support the indices. It is not to try to make more money.

It is not to try to gain the system. It is to be in support

of this system voluntary. And so we do that and have done

that.

One thing that may be a little bit different is

the ‑‑

MR. HARVEY: So let me make sure I understand

exactly what you said there. You do a certain number of

basically index style transactions, forming transactions, so

fixed prices around the next month, the next ‑‑

MR. NAUMAN: And our portfolio of sales in any

given month, any given season, we\'ll have some fixed‑price

deals, we\'ll have some index‑based deals scattered

throughout the country. We\'ll do some deals that are priced

against the NYMEX, basis deals. And, again, that gets back

to customer desire more than anything. From our side, we

push and I push the people that work for me to do a certain

‑‑ not a fixed level, but I remind them of the need to do

some fixed price deal making. You can\'t have everybody

doing index deals, the system won\'t work.

MR. HARVEY: Right.

MR. NAUMAN: So any given month and there\'s no

fixed percentage, and depending on volatility and people\'s

desires, there will be a little less index, a little more, a

little more fixed, a little less. It is what it is. It is

what the market wants.

MR. HARVEY: But you indicated that that was not

necessarily ‑‑ I don\'t want to say ‑‑ I don\'t want to put

words in your mouth, and I can\'t remember your exact words,

not necessarily for commercial reasons for you.

MR. NAUMAN: That\'s correct. That\'s correct.

MR. HARVEY: It\'s really to help generate a price

in the ‑‑

MR. NAUMAN: I\'m comfortable that over the long

haul, if my portfolio includes fixed price deals, basis

deals, various index deals which it does, that those will

perform equivalently.

MR. HARVEY: Okay.

MR. NAUMAN: Because the market is that liquid

and that transparent. The differences we over time are

talking about are on the quarter of a cent, half a cent

level. Nothing to do with price swings over time. So,

yeah, my point being we\'re not trying to advantage ourselves

by doing fixed price deals, we\'re trying to support the

voluntary system, and I think it does.

One comment I would make though about our

behavior and changes, with the index publishers, providing

more information than they used to and providing information

about the number of counterparties and the volumes of trades

at certain index locations, we look at that. It\'s important

to us, it\'s important to everybody in the marketplace.

Where we found that a given index point is thinly traded,

few counterparties, low volume, we move off it if we\'re not

comfortable. That\'s a choice we and everybody have and

we\'ve done that.

And I suspect over time the natural order of

things would be that those that are thin and those that

aren\'t in the market\'s interest will die off. And I have no

problem with that. And over time I suspect that certain

next points will become even more liquid and become a

smaller, but much more liquid and heavily traded question.

I have no problem with that either. I think that\'s healthy.

MR. PERLMAN: Can I ask a follow‑up question on

that. And a few of the other people had talked about this

issue as well. And it had to do with the comments made

about if there was a mandatory reporting requirement, people

would be less interested in doing fixed‑price deals and

would move to indices which leads me to conclude, as you\'ve

just described, that for many of these participants there\'s

an equivalence. There\'s no business reason to do a fixed‑

price deal because of an index deal is just as good. And

that just seems counterintuitive to me. It would seem to me

that if you don\'t like volatility, you wouldn\'t want to do

an index deal. If you\'re willing to accept volatility, then

you would do an index deal and your portfolio you have a

balance and things work out in the end and there\'s a breath

there that allows you to not have to make those kinds of

difficult judgments.

But I would think, and correct me if I\'m wrong,

that\'s really what I\'m asking, is there truly an

indifference from a business perspective whether you would

do an index deal or fixed‑price deal such that reporting

could tip the balance one way or the other as to which way

you would go with your procurement for your business, bottom

line.

MR. NAUMAN: Well, I\'ll answer first. Every

cubic foot of gas that we sell is just as important to me as

it is to everybody else. So I wouldn\'t want to discount the

fact that we\'re chasing every cubic foot and they\'re all

important.

The fact is that if we do a fixed‑price deal this

month, and then I\'m going to ‑‑ I could almost turn it

around that the gauge of volatility is well, my fixed‑price

deal compared to index, how did I do? Well, you know,

that\'s because the index is kind of the market standard. We

all talk that language. And internal to my company, that\'s

one of our benchmarks, what\'s the index versus a fixed‑price

deal?

So, again, that\'s a level of confidence that we

have that that\'s a benchmark.

If I do fixed‑price deals this month for July,

you know, relative to the index given the point, I may come

out ahead, I may come out behind. Next month, just the

opposite, next month just the opposite.

In our case, certainly we can handle that kind of

month‑in, month‑out fluctuation over enough time and whether

that\'s 12 months, 24 months, 36 months, my belief is and the

data internally that we look at is that will even out. And

so my fixed‑price deals to give the location over time,

they\'ll be the same as the index which would be to me

intuitively what you would think would happen.

MR. HEDERMAN: I also have a follow‑up. And then

I\'d like to see if anyone else on the panel had a comment on

it. As you elect to do these fixed‑price transactions, are

you finding that your customers are interested in doing

fixed‑price transactions or are they doing it for the same

good citizenship notion, if you will?

MR. NAUMAN: Well, I\'ll answer briefly on this.

Let me clear up a misconception first of all, that I suspect

is out there about how our business works. I mentioned our

size and I think people are kind of familiar with that. It

may surprise you if I told you that the people that do this

trading for us that is not hundreds of people sitting in

front of luminescent screens. In fact, if I looked down

this table here, the people that sell our gas in the U.S.

there are a lot more people around this table than there are

selling gas for ExxonMobil.

They don\'t sit and work off of some electronic

hub where they don\'t actually know the customer. The vast

majority ‑‑ and when I say the vast majority, I\'m talking

about pretty much all of the gas that we sell. We sell by

picking up a phone and calling a customer and asking them if

they\'re interested in a certain amount of gas in a certain

place and what price they would be willing to pay.

And then we\'ll ask another and another and

another and there are dozens to ask. And that\'s a good

thing. And those dozens that we ask have responses. And

we\'ll ask them, well, how would you like to do that deal?

Do you want to price that against Florida Gas Transmission

Zone three, Transco Station 85, there are choices in terms

of which index. They may come back and say, no, I\'d like to

do it against the NYMEX for whatever reason.

Some say, I\'d just as soon do a fixed‑price deal.

And, to be honest, I don\'t know. Are they good citizens, I

hope so. Are they interested in having a portfolio that\'s

rounded out with some fixed price deals, some basis and some

index? I suspect so.

In some cases are they hoping to hedge that fixed

price and make some money? Maybe that\'s up to them. I

guess the point I would make is, we\'re actively seeking and

actively encouraging a breadth of deal making, not just

index deal making, but also looking to find fixed price

deals. The reason for people doing it including ourselves

is probably many and broad.

MR. HEDERMAN: Fair enough.

Yes, Mr. Musur.

MR. MUSUR: I have a question. Who the

customers? Are those end‑use customers or are those

marketers who are filling their book for their customers in

these people who are deciding whether they\'re going to go

with a fixed‑price or index or index against NYMEX or

whatever.

MR. NAUMAN: We are to the bilateral questioning

phase.

(Laughter.)

MR. HEDERMAN: This is regulatory flexibility.

MR. NAUMAN: It affects my answer. I\'ll answer

the question and then I\'ll get out of the way of this.

MR. HARVEY: We really are a lot more comfortable

with panels that disagree with each other.

MR. NAUMAN: Yeah, I understand that.

MR. HARVEY: So this is great.

(Laughter.)

MR. MUSUR: I understand that.

MR. NAUMAN: I don\'t think I\'m going to disagree

on this one. All of the above. And, again, don\'t think I\'m

giving away any commercial secrets. We sell to a whole lot

of people.

We sell to dozens and dozens and dozens of

customers every month, every day. They\'re different every

day, every month. Some are other producers who need it for

their refinery. Some are marketers who are going to

aggregate gas from small wells in West Texas that I have and

they\'re going to sell it to somebody down the line. Some

are industrials, some are LDCs. So we sell gas directly to

people that I call \"burners\" and I really like selling to

those because that connects my supply with an end user.

Some of it for just practical reasons goes

through a marketer. Some of it goes through people that

don\'t look a whole lot different than me, but just happen to

have a consuming site nearby.

So, when I say \"customer\" it\'s soup to nuts.

It\'s very small entities to very large marketers.

MR. MUSUR: Okay. Thank you for the answer. In

my business, and I don\'t want to talk for all of my members

because we\'re all different in how we do these things. In

the face of volatility, we tend to do more hedges because we

want to protect a price that we know that we can live with,

not one that we necessarily like. And the more volatile and

the worse it looks, the further out we\'ll start pushing the

hedge. And that\'s what we\'ve been doing.

The problem with the market is that it\'s been

contracting in that there isn\'t a lot of liquidity in the

forward months because everybody has pulled back on that.

So it\'s becoming more and more difficult to do. You can see

a price, but you can\'t get it is what it comes down to.

It would seem to me that for a producer they\'ve

got exactly the sometimes problem. You can\'t live with

index only because the fixed contract is your hedge. And

how volatile and how well you think you\'re going to perform

in the market, what direction is this going will determine

how much you have to have as fixed contract just to protect

your own business and probably has less to do with being a

nice guy and want to see the market work. It\'s part and

parcel of the same thing. It isn\'t a choice between is it

all indexes all fixed price. It\'s where am I going to lay

my risk and how much am I going to keep for myself?

MR. STRAWN: I think we have one point of

consensus here and that is that all of the companies that

are involved that I represent and I think some of the other

people on the panel represent, all have a different risk

level and a tolerance of risk. I think where we start to

differ a little bit is how we address that risk. And I

think when you start talking about long‑term deals, as

really some of the others have said here, it is how you

compare that versus the index. And if anything, we\'re just

beginning now, I would like to categorize really the overall

situation going back to an earlier question of what\'s

happened over the last two years.

I would say it\'s really the two C\'s, caution and

creditworthiness. Meaning that caution and that we\'re not

so much concerned now over the last two years about the

price indices that we\'ve been discussing here, we\'re more

concern about price. And just the fact that there\'s a

supply/demand imbalance that\'s being addressed in a variety

of ways, it\'s just reflective in the indices. The indices

aren\'t really the problem, they\'re just reflective of the

larger problem that we all see in the industry as being

currently addressed by LNG and any number of things.

But as far as who is the ultimate consumer, I

said we represent probably a million and a half people or

more that are employed. Throughout this country. But we

indirectly affect any number of households and consumers by

virtue of that employment. And when I say, \"all types of

people\", I mean, we are in some towns that probably most of

the people on this panel have never heard of. These are

really the life blood of the United States. And so we are

very concerned about the volatility of pricing.

But as far as the indices being really the

culprit right now, we just don\'t see it that way. And if

anything, if you start to talk about mandatory reporting,

because of this competitiveness issue that I addressed

earlier, you really start to make people rely more on the

index itself to take a shorter position, not a longer

position. Right now people are starting to put their toe

into the water as they assess more supply options that are

apparent in the market. They\'re starting to get comfortable

with the notion of LNG coming in. They\'re starting to get

comfortable with other types of supply that we\'d like to see

encouraged in the Rockies and other areas.

As soon as you start talking about mandatory

reporting, then you have a withdrawal of that involvement or

more engaging in the overall market. And that\'s what we\'re

concerned about because people now, because they\'re

concerned about the guy on the other side of the fence,

what\'s he doing? How does my deal compare? So they go

index or they use financial instruments.

So, if you want more fixed price reporting, we

have to believe that really start focusing on the issues

that concern us and our opinion which is the supply/demand

and equity, not the indices themselves. They seem to be

improving and getting better.

MR. MUSUR: I don\'t think this is a discussion

about whether the price of gas is any good and whether

there\'s going to be pressure on markets, et cetera. I think

from our viewpoint we\'re looking to reduce as many risks as

we can in this. And if there is a risk that the price

that\'s reported by the index is anything other than the

consensus price at that point, we should try to eliminate

it. That\'s all we\'re suggesting. The rest of these things,

I mean, you\'re not going to change the price down from \$6.

And you\'re not going to convince the EPA that we shouldn\'t

be doing the mercury mac. That\'s going to happen anyhow.

But to get the other pieces that we can address

to remove those risks that don\'t need to be there is what

we\'re asking you to do.

MR. NOVAK: The vast majority of the APGA

companies are really small systems, as I said, poor. Some

of them have less than 1,000 customers in their system. So

when they come in and when Mr. Nauman is talking about the

negotiation process and going back and forth through the

various customers that he deals with, many of them are price

takers. They don\'t have a lot of negotiating strength. So

keep that in mind as you look at this.

MR. GERARDEN: I have a question about

counterparties. Mr. Henning in the first panel mentioned it

as from AGA\'s perspective as something they would like to

see reported by indices. And on this panel several of you

have talked about the importance of counterparty information

whether it\'s in the context of mandatory reporting or not.

In our current system of voluntary reporting to price index

developers, is the industry ready to step forward with

voluntary provision of counterparty information to price

index developers? It\'s a step that the Commission stopped

short of in the policy statement based on some conflict at

the time in the industry as to whether that would be widely

agreed upon by industry participants.

So my question is, if the Commission were to push

for provision of counterparties, would industry participants

cooperate with that, or would it result in a decrease in the

amount of voluntary reporting?

MR. NAUMAN: I can say with certainty you will

see a decrease in the amount of voluntary report. We\'ve

discussed this a lot not just among the member companies of

the NGSA, but with a wide swath of end users. And you will

find people, and it\'s just like this panel, you will find

people all over the map in terms of, well, wouldn\'t be

better if everybody knew all the counterparties and you

could match them up and there\'s this theoretical, sure, that

sounds great. There is also the pragmatic concern though

that as you dig deeper and deeper into the commercially

sensitive part of the business, not just the \"how much did

you sell your gas for\", but \"exactly who did you sell that

gas to\" that there becomes some concerns, and I think

they\'re legitimate concerns about having that data collected

anywhere, whether it\'s a publication, a data hub, or

anything else. And in the discussions that we\'ve had, and,

again, this isn\'t just producers, and it\'s not just

industrials and it\'s not just LDCs, there are a fair number

of people who would clearly say, if it comes down to

choosing, do I report or do I not report? If counterparty

identification is the hook that goes with reporting, you\'ll

get some that will say, I\'m out.

And so I think personally that would be very

counterproductive to try to compel people to divulge to a

data hub or the publications exactly who they\'re doing

business with. And those commercial concerns run the gamut.

They run from producers to end users and in terms of why you

would want that data to be out there getting collected by

somebody that had full knowledge of who is doing what with

whom across the whole market. So that\'s not anything that I

see as being unique to any one segment of the market.

But in answer to your question, I think you would

see a decrease in the quality of reporting.

MR. STRAWN: There is no question that you would

see a decrease. I have to echo the same sentiments. And

there\'s just such an overall sensitivity. Just in the last

few days we\'ve heard about some involuntary reporting of AOL

data. And not to mention the fact that that was an employee

of that particular agency. I mean, there are any number of

parameters of ways that information can be divulged.

Most of our member companies have been coached in

the way we even conduct ourselves on airplanes. I mean, we

have to restrict our conversations to the news of ‑‑ the

gossip of the day, like what\'s happening with Britney Spears

or something like that.

(Laughter.)

MR. STRAWN: As opposed to even hinting, and I

really don\'t mean to bring levity to the conversation, but

the reality is, there\'s been leaking of information

involving industrial companies just in the most casual of

conversation.

Now, if you add to mandatory reporting and then

have a number of parties involved in this action, just the

casual conversation on an airplane or in a restaurant

somewhere, leaks that information and we have a competitive

disadvantage, then you have really ‑‑ you have affected the

way we do business in a free market situation, inadvertently

while trying to correct what you perceive as another problem

in another area.

So it\'s the sensitivity of the information and

just the nature of human beings and the way they discuss and

go about their business that we\'re concerned about. We\'re

not trying to be clandestine in the way we protect our

counterparties. We\'re concerned about how the information

is collected, who collects it, and how its disbursed.

MR. NOVAK: We would suggest a half step. And we

clearly want the number of counterparties reported by the

publishers. That\'s more information that helps us make our

own judgments about the points, yet, we are sensitive to the

concerns that others have expressed on this panel about

confidentiality. And what we would suggest is, rather than

a mandate that counterparties be reported, that it be put in

the bully pulpit or encouragement. And then with that we

could look at our bilateral negotiations when the

counterparties have a concern about whether we report their

data. So that if we\'re willing to report it and they don\'t

mind that they\'re being reported, it\'s a step in the right

direction. And, you know, this is not something that\'s

going to be ‑‑ you need to look at the whole process. This

is not something that\'s going to be fixed over night. But,

again, if we can get around ‑‑ I don\'t know if we ever get

around the commercially sensitive information for the end

users, but at least between LDCs and marketers, and the

parties that those of us with marketing certificates ‑‑ who

does he sell to? Maybe at that level we can get this

information out there and that would help.

MR. GERARDEN: I think that the AGA members would

be more willing to provide counterparty data than perhaps

producer or end user?

MR. NOVAK: I think some of us. Certainly not

all because I\'m sure there are some AGA members that feel

the same way that the end users do.

MR. MUSUR: We have the same problem now, it\'s

just that not all the data is in the same place in terms of

disclosure. We\'re just talking about trying to put it in

one place that\'s secure. And confidentiality is a huge

thing for us. Because we understand what happens when all

of that data gets out. And it does affect us competitively.

But, you know, that assumes a market that\'s

reporting prices that don\'t exist. And I think that affects

us even more. You know, there are so many things associated

with gas that give us the willies, I can\'t even begin to

count them. Three days ago, article in the Wall Street

Journal, it says that the NYMEX is considering hiring

Chairman of the CFTC, Jim Newsome, as their president.

Well, take a look at the history of the CFTC. I don\'t mean

to slam anybody here, but it looks like a training ground

for the NYMEX. You know, people go from there to there.

You know, Wendy Graham was the first. I mean,

went from the NYMEX right to the board of Enron.

MR. HARVEY: I would just suggest we know that\'s

not true for Mike.

MR. MUSUR: I understand that.

(Laughter.)

MR. MUSUR: As a matter of fact, Mike is ‑‑

(Off microphone comments.)

MR. MUSUR: Mike is going to my alma mater and I

couldn\'t be more pleased.

(Laughter.)

MR. MUSUR: It\'s just that it\'s there are a lot

of pieces to this. If we can start shining some light on

some of them, it takes away some of the uncertainty.

MR. HARVEY: Let me elaborate on this because I

think there\'s a strain through this and a little bit through

this morning, the earlier panel, that I would like to

explore a little bit. And that\'s, I think there\'s a kind of

continuum between competition in reporting which we see as

kind of a good thing, and the fact that in order to verify

having all the information in one place, becomes kind of

stronger in terms of verifying which tends to push towards a

mandatory and a single sort of place. And there are a

number of issues, one of which we\'ve struggled with, and I

think you all have struggled with us on which is one of the

policy statement requirements of completeness.

We had reported today Atlanta Gas Light is a good

thing that 85 percent of their activity in the day‑ahead

market takes place on ICE and it gets publicly ‑‑ it gets to

the public through that mechanism in a very quick and easy

way. And not to have any reason why that is. It almost

certainly has to do with sometimes it makes sense to call

people, sometimes it makes sense to transact electronically

for them. The issue for us was, in order to tell us you\'re

reporting officially, we are worried about companies that

might use the ability to contract here and to report here

and to report here in a manipulative sort of way. It\'s one

of the things we get paid to worry about in the process of

things.

That tension, that where it makes sense to lie on

that continuum seems to be a pretty active ‑‑ you know,

actively driving a lot of these concerns. The goodness of

having competitive folks looking at sets of data and saying,

but not having a complete view at any point in the process

is a sort of concern.

And, again, a concern that we\'ve been worried

about and from a policy perspective on how to make that

work. Can you help me on that? I mean, I think I\'ve got a

couple of views of this. And I\'m pretty clear where we are

on the spectrum. It sounds like otherwise people are pretty

comfortable letting that work itself out. But should we be

worried about that? Is that a possibility for manipulation?

I hear a lot of support for our paying attention to those

kind of issues and making sure that they don\'t happen.

Is it okay that it\'s harder for us to do that

towards one end of the spectrum versus another?

MR. STRAWN: Thank you for those comments, first

of all. But I guess one of the things, I want to elaborate

a little bit more on an earlier point which will address

your question. And that is that really over the last two

years with the scrutiny that the Commission has put on this

issue, I\'ve never had ‑‑ most of my members say to me and my

own personal experience of dealing with the markets, I\'ve

never had as much caution as we approach the markets. And

when I say caution, I mean, most of the people that we\'re

dealing with, our counterparties, everybody is treading

lightly now, much more lightly. It\'s not that they were

doing anything incorrect before, in fact, we always strive

to work with the highest quality counterparties in every

case. But what\'s different now is that when I talk to

someone, no matter how large or small, and I talk to our

member companies, everybody is saying, I want to make sure

that all the paperwork is correct. I want to make sure that

all the reporting is accurate. I want to make sure that

there are no questions. I want to make sure it\'s black and

white.

And that\'s a big change from two years ago. So I

guess my general point, and I\'ll leave it alone for the

others to comment on, is that you, believe it or not you\'ve

infused a lot of fear and concern about the possibility for

punitive action into the system right now. Believe it or

not. And it\'s that balance and that ‑‑ and I\'ll just use

the word ‑‑ \"fear\" that I think probably prevents the most ‑

‑ most of the people or the vast majority from even

considering doing something in the way of market

manipulation. I mean because with Sarbanes, Oxley, and all

the other ‑‑ people are concerned about going to jail, to be

perfectly blunt. So everyone, if you weren\'t treading

lightly before, you\'re treading very carefully on how you

report and who you do business with and how your

transactions are reported. And to even hint at doing

something like in the way of controlling, I would say that

that would have to be on the very low end of the spectrum.

So, in a word, I think you\'ve done a good job in

putting fear into the system of what could happen, and I

think just with that continued scrutiny you maintain that

level of fear and proper adherence to good quality control

in the overall administration of gas purchasing.

Thanks.

MR. NOVAK: We would concur that, you know,

what\'s been done is helping. It\'s making sense. It\'s good

that people are as concerned as has been mentioned.

With regard to doing deals at ICE, is it going to

wait. We encourage ‑‑ we look at the encouragement or the

cheerleading role. We support voluntary reporting. If you

go out and do a deal on ICE, you\'re essentially opting in to

voluntary reporting for that transaction. That\'s good.

But, also, you need to consider, and we look at

this, some AGA companies report, some do not. There are

many that are considering. They\'re evaluating what they

have to do to report. And some of the same concern that

they want to make sure that they have their process in

order. They want to make sure their systems are tight.

That\'s why they aren\'t there yet, but they\'re making that

evaluation and hopefully they\'ll be coming around.

We\'ve had a few more companies sign up for

reporting since the initial round. And that\'s why we need

to continue and let things evolve.

MR. O\'NEILL: You made an interesting point.

Sometimes you go to ICE, sometimes you don\'t. ICE,

obviously, like you said is opting for reporting. ICE has

your counterparties, nobody else does. And I assume, you

know, you can trust their confidentiality, and for the other

members of the panel.

How do you decide or when do you decide to use

ICE, when do you decide to go bilateral? What is your

confidence level in ICE information versus other types of

information? We all know that ICE has much better

statistics and is only reporting real transactions. I\'m not

sure that ‑‑ I don\'t want to say that that\'s happening now,

but we knew that it happened in the past. So, how do you

make those decisions and how do you use the information?

MR. NOVAK: I\'m not a gas trader, so I\'ll have to

kind of relate my conversations. It\'s more of a portfolio

approach and that you\'re looking on any given day, you can

do much here, you can do so many fixed price deals, you

might do some ICE deals and so forth. And it maybe

something that just evolves out of the process of how

people ‑‑

MR. O\'NEILL: But an ICE deal is a fixed‑price

deal, isn\'t it?

MR. NOVAK: Yeah. What I\'m getting at is whether

you do a fixed‑price deal bilaterally versus a fixed‑price

deal with ICE. And just in the whole process much of it is

the phone calls from day to day, how you feel just on this

day, price is working, and what you feel. So I don\'t think

that people are going to ice because they want to report on

that day and they don\'t want to report on another day.

All we were saying was that it\'s good that they

can go to ICE and that they opt in on that day because that

helps support the voluntary reporting system.

MR. NAUMAN: I don\'t think trading on ICE or

Enron on line before it or any other electronic trading

platform has really anything to do with people\'s desire to

report or not report prices.

It\'s one of many choices that are out there. You

ask how do you decide? It\'s probably a different answer for

everybody that you would ask. For us we use it, we have

access to it. As I stated earlier, particularly in the

seasonal and the monthly markets, the deal making that we do

is bilateral. We want to know the customer. We don\'t want

it to be just a number flashing on the screen. There\'s

reasons for that. The customers often times have different

levels of creditworthiness. Customers have different

desires. They have something nonstandard in their contract.

So the answer is, it will vary and the reason we

use it or don\'t use it, nothing to do with desire or lack of

on price reporting, it\'s a commercial decision.

MR. MARTINEZ: Just one clarification. ICE and

Enron line mentioned the same line, ICE are bilaterals?

People trading ICE is bilateral, people trading on ICE can

set up their own credit concerns with counterparties and so

just want to clarify, you know, that it\'s just a meeting

point, a platform, and it\'s not really taking ‑‑ becoming

counterparty to anybody. So it\'s just to avoid the

confusion?

MR. NAUMAN: Certainly if our point ‑‑ but I

would make the point that it\'s a dating service of sorts.

It will match you up ‑‑

(Laughter.)

MR. NAUMAN: ‑‑ with somebody who is, you know, a

green light for you. You know, they have passed a credit

test. But that initial matching up, you don\'t know who they

are. And I envision sometimes that when people click on the

little green light and ExxonMobil flashes up, they say, oh,

God, I got ExxonMobil this time.

My point being, for us, and it\'s going to vary by

seller and buyer, for us it\'s a choice and it\'s a choice

oftentimes to pick up the phone as opposed to rely on a

computer screen.

MR. PERLMAN: A follow‑up question on what Steve

was getting at. And I just wanted to see whether people

feel that the Commission\'s component of its policy statement

that said, if you report, we would like you to report

completely which is report all your trades at Henry hub as

well as maybe some less liquid point. And all your buys and

all your sells, the whole deal, creates that expectation on

the part of the Commission and creates any problems or

reluctance to report on the part of anybody who is in the

business.

MR. NAUMAN: There\'s a quick answer for me. No.

People ought to report every deal they do. You can\'t

selectively report, or you shouldn\'t.

You asked the question, you know, is there a way

to selectively game it? You know, the people that game it,

the people that are out there trying to manipulate, theirs

isn\'t and in the absence of rigor in the way that they

report, it\'s not an absence of, I left one off by mistake,

it\'s unethical behavior. They\'re liars, they\'re cheats.

They\'re wrong.

A rule that says, you need to report all of your

deals helps minimize the chance for people to go and try to

manipulate one or another. And so from my standpoint I

can\'t see any reason why that part of the policy statement

would cause anybody a problem. You should report all of

your deals.

MR. NOVAK: On behalf of National Fuel, my

traders would be upset with me if they didn\'t take this

opportunity, weekend deals. The question I was asked when

we were going over the policy statement which is, do they

really mean all? And I said, each all, that\'s what they

mean. Well, what about on the weekends when we come and we

might do one or two clean up deals? They\'re not going to be

reported, do we have to report these? And I said, if we\'re

going to comply with the policy statement, we have to report

them.

And then it got to be, but why? What does it

serve? And I don\'t know if other companies look at that and

they look at the cost of ‑‑ you know, there\'s what you do

during the week, the nine to five, Monday through Friday and

you might have routine processes in the system speed and

boy, each reportable deal goes out. Something happens on

the weekend, and it\'s not that you\'re trying to hide

anything. But it\'s not the usual process and that may, for

some people ‑‑ this is what I\'m guessing, that maybe \"all\"

shouldn\'t be all.

MR. O\'NEILL: Could you describe a \"clean‑up\"

deal?

MR. NOVAK: A clean‑up deal may be where you had

a supply that fell through and you\'re looking at ‑‑ you\'re

coming in on Saturday and you see that you\'re going to be in

am imbalanced position, and there are a few other people out

there and you can find an alternative source, so you don\'t

want to rely on the cash‑out that day. That would be a

clean‑up deal. Or it can be the other way around where

maybe you would make a sale on the weekend because somebody

else is in the opposite position and you\'re capable of doing

it. So much of this is on the getting back to the phone

calls that people make from day to day. There are people

that you conduct business with and they know, you know, who

they can call.

MR. O\'NEILL: And this is someway inherently

different from what you do during the week?

MR. NOVAK: The difference is that it might be

just one or two transactions. Often you most often come in

on the weekend and everything is just perfect. But,

generally, it\'s not uncommon, people provide 24‑7 coverage

for problems, but it\'s not uncommon for somebody to come in

on a Saturday and really just say, okay, let\'s make sure the

weekend is working right. And that\'s what creates the

opportunity to do it.

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MR. O\'NEILL: And this is in some way inherently

different from what you do during the week?

MR. NOVAK: The difference is that it might be

just one or two transactions. Most often, you come in on

the weekend and everything is just perfect. But, generally,

it\'s not uncommon ‑‑ people provide 24/7 coverage for

problems, but it\'s not uncommon for somebody who\'ll come in

on a Saturday and, you know, really just say, okay, let\'s

make sure the weekend is working right and that\'s what

creates the opportunity to do it. So we report it. It\'ll

get reported on Monday what the rest of the deal is, but I\'m

saying that\'s a change that we had to make sure in our

system that it did do it. That that deal didn\'t

inadvertently fall off.

MR. WEAVER: We believe that at the ABGA that

it\'s the treat of the mandatory reporting that stick us.

It\'s the one that drives a lot of people to look at their

deals and make sure that the deals are done and make sure

that the deals are reported. It\'s very important.

MR. O\'NEILL: You\'re saying they have threat but

never exercise it.

MR. WEAVER: Well, if it\'s necessary, we think it

should be exercised.

MR. O\'NEILL: Okay.

MR. WEAVER: We think that still the market is

still broken in the way it has reported.

MR. WALKER: We believe that it is important that

everybody report all of their trades. We support that part

of the policy statement. We also agree with the policy

statement in carving out affiliate deals because they\'re not

arms‑length type pricing. We also support carving out

structured deals and find that it takes very careful due

diligence in our operation to make sure that when we report

we report standard products and do not allow structured

transactions to distort the data that we\'re reporting. It

takes very careful due diligence on the part of a deal

capture system to make sure that that happens and we do that

and believe that that is the spirit and intent of the policy

statement.

MR. MUSUR: We believe that the indexed system is

absolutely crucial to end use customers to make the all

natural gas system work and that if we\'re going to have an

indexed system that it needs to report all of the pertinent

information that goes into making it indexed. Somebody

correct me if I\'m wrong, and I\'m sure with this group they

will, to my knowledge, IC is not a public number. You want

to know what the price is on IC, you join or you pay

whatever the annual fees are and the connection fees and all

that. It\'s not like picking up a newspaper and finding out

what NYMEX is trading gas for today.

MR. HARVEY: I will say, at least, as of today,

if I understand correctly, it\'s certainly the way I get IC\'s

number is by request. They will e‑mail it to you everyday.

MR. MUSUR: But what the indexes do then is take

all of these things and they put into a form that we can

use. Because in a lot of cases, I don\'t care what the

momentary price of the commodity is. What I want to do is I

want to lay in some gas for a week and agree to a price

that\'s an average price published by an index that has all

of the data and that\'s what we\'re looking for and we want to

have confidence in that. We think that all of the

information needs to be reported and, if there\'s some way of

doing that other than making it mandatory, someone needs to

explain to me how that works.

MR. STRAWN: I would just reiterate we\'re

encouraging all of our members to report as completely as

possible at all levels at all times and it\'s really

essential the threat of the mandatory that\'s keep them

engaged and putting their toe more and more in the water.

And, again, I have to say it one more time until you get

tired of me saying it, if you have mandatory reporting, you

will have few fixed priced fields and more reliance on a

more thinly traded index.

MR. HARVEY: I do have one follow‑up question

that I\'d like to ask. I know we\'re running out of time, but

Mr. Novak, you mentioned that AGA had several members who

are still looking actively at possibly reporting. Is that

because they\'re getting their confidence in their systems or

confidence in what we\'re doing or what?

MR. NOVAK: The expression ‑‑ one of the people

told me we\'ve got to get all our ducks in a row. We don\'t

want to make a mistake.

MR. HARVEY: Just before we end, I\'d like to

share one antidote here recently for us that we see again,

antidotally, as a kind of positive step. We were contacted

a couple of weeks ago by a company that reports its trades

and said that going into Memorial Day weekend in order to

adjust for a four‑day weekend, I guess, that prepared for

usual trading they wrote some special queries and, in

writing those special queries and looking at the results,

realized that they probably had some systems problems with

their reporting.

They did a couple of things that we like a great

deal. They contacted their publisher and said we\'re going

to stop reporting until we\'ve got this fixed. We want you

to know we\'re working on it. And they called us and said we

want you to know we\'re commitment to this, but, in reviewing

our process, we realized we had problems. We needed to stop

and we\'ll go forward. I kind wanted to throw that as a

story in that it gives us a fair amount of comfort that

people are taking these processes very, very seriously.

That they\'re using opportunities to double‑check those

processes and make sure that they work. The fact that it

was automated in the first place gets a long way away from

sort of trader opinion kind of thing.

So, to us, it really has been a great story and a

good confirmation, though, antidotal, in terms of that

process being taken more seriously.

MR. MARTINEZ: Just one last question. I\'m very

curious on the comment by Mr. Strawn that saying that

mandatory reporting would push people away from fixed

pricing to indexed. If everybody knew that, then how would

you ever rely on an index that even fewer people will report

into?

MR. STRAWN: This is kind of a chicken or the

egg. I\'m trying to speak collectively, but, yet,

individually at the same time. People are trying to balance

their concerns about their competitiveness versus their

overall view on the market and it\'s rare that we have a

unanimous opinion amongst our members, but most of them just

feel that the overall notion of mandatory reporting, because

of the cost associated with it and just the potential of

having that competitive influence or that competitive

possibility of a leak of information ‑‑ they haven\'t thought

through every long‑term implication of what could happen

with the market, but they know what they\'re afraid of.

They\'re afraid of the notion that some portion of that

information may leak as they consider ever other portion of

the long‑term effect, they focus on one piece at a time.

And, unfortunately, again, if you ‑‑ what you

don\'t want is people taking short steps right now. You

don\'t want people taking short and mid‑term steps. You want

them to take short, mid‑term and long. If nothing else,

while they sort out what the issues are, they\'re going to

take short and mid‑term steps, which is exactly what you

don\'t want in this market because contributes to the short‑

term volatility. So I don\'t know if that\'s the perfect

answer, but the bottom line is they know what they don\'t

want and they\'ll have to sort through what the implications

would be if they have to go to mandatory reporting and that,

in itself, will create volatility that none of us really

want.

CHAIRMAN HEDERMAN: I would quickly reiterate

during my corporate days there were oftentimes where we were

looking at unanimous data and you were assigning

probabilities of who was Competitor A and who was Competitor

B as part of the exercise.

Well, thank you very much for an interesting

morning. We have at least as full an afternoon planned and

we plan to get going at 1:15 p.m.

(Whereupon, a recess was taken to reconvene at

1:15 p.m.)

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A F T E R N O O N S E S S I O N

(1:22 p.m.)

(PANEL THREE)

CHAIRMAN WOOD: Thank you. This third panel will

be addressing issues from the perspective of index

publishers and other index developers and it\'s a large

group. I hope we can keep up the spark creation level that

we had in the last panel and I\'m sure it\'ll be a good

variety of opinions here.

Steven, you want to get it started?

MR. HARVEY: Yes. I\'ll just remind everybody.

I\'ve got a pretty short window. I\'m going to hold you to it

if I need to, but, as long as we keep moving, that\'ll be

great. We prefer the interaction to the initial

presentations. And, with that, let\'s start with Mr. Weigel.

MR. WEIGEL: Thank you. I\'m Miles Weigel, Senior

Vice President of Argus Media. Argus is the leading

provider of price assessments, business intelligence and

market data on the global energy and transportation

industries.

Argus Media supports the Commission\'s ongoing

advocacy of compliance with the policy statement for

reporting to the index publishers. The reporting issue had

been advanced to a stage that we believe where data

providers know precisely what they\'re asked to do and how

they should proceed if they want to submit information.

An increase number of eligible companies are

responding affirmatively and have been able to yield value

for contributing the indices. Argus has been assessing the

electricity prices in North American since 1999. While most

of the focus this morning has been on the natural gas

markets, I\'m going to be talking our experience in reporting

on electricity.

The majority of our price reporting is done by

assessment covering day‑ahead and forward markets. However,

Argus also regularly publishes hourly electricity price

indices covering the most active non‑ISO trading ‑‑. To

further add market transparency and consistent with

Commission recommendations, Argus will begin publishing the

total number of transactions that were used in each hourly

index calculation effective September 1st.

Argus continues to make progress in broadening

the market participation in our hourly electricity indices.

However, the progress, we believe, is geographically uneven

with cooperation most prevalent in the West. For example,

the Pacific Northwest hourly indices have remained resilient

during the market downturn of the past two years. There

remains an active, vested interest in market transparency by

the regional players.

In ECAR, the participation remains modest,

however, there has not be a material change since the policy

statement. In California, the region shows promise and

interest for development of more robust, hourly price

indices with clarity provided by the policy statement. The

remaining Eastern interconnect regions of CIRC, Entergu. SBP

Maine of limited hourly price transparency with no material

change in contribution since the policy statement.

Argus remains concerned that overly prescribed

index methodologies do not uniformly best serve the industry

and potentially are counter to the goal of increasing market

liquidity and price discovery. Market assessments, using a

published methodology, remain an important pricing

instrument in illiquid markets where a mechanism, deal‑

weighed index methodology could potentially be skewed. It

is conceivable that the parties could be subjected to bases

risks associated with a more liquid approved index that,

perhaps, is weakly correlated with an assessed market index

location more aptly suited for pricing the deal.

In closing, it\'s our view that the ongoing

uncertainty with regard to the Commission\'s next steps has

kept many electricity market players on the sidelines in a

let\'s wait and see mode. We hope that today\'s event can

provide insight and allow the markets to refocus their

attention on structural issues to support recovery.

I\'d like to thank the Commission for the

opportunity to be a part of this panel. Thanks.

MR. HARVEY: Thank you very much.

I would like to say before we go on, there\'s a

sort of general logic to our panel ‑‑ the first panel this

afternoon. It may not be apparent, which is, we wanted to

deal with primarily electricity oriented reporting,

primarily gas ‑‑ reporting and then sort of robustly both

sort of in order.

The good news about that is we didn\'t talk much

about electricity reporting this morning and so we\'re

excited to hear from folks with a strong focus along those

lines as well. And, with that, we\'ll go to Mr. Johnson.

MR. JOHNSON: Thank you. Good afternoon. My

name is Brad Johnson. I\'m the Global Energy Manager for

Bloomberg. Bloomberg is a global provider for pricing data,

news and analytical tools for the financial markets via our

Bloomberg professional service.

I\'d like to first start off by thanking the

Commission for inviting us to participate on this panel.

Bloomberg is committed to supporting efforts to bring back

confidence in the U.S. energy markets. And, although we

were not as active members of the CCRO Market Pricing,

Reporting and Action Committee, we would like to recognize

those organizations that participated and provided strong

leadership in their efforts and that includes Platts, NGI

and ICE as well as market participants, Duke, Phillips and,

of course, we want to extend a congratulations and thanks to

the CCRO for putting together that industry coalition. We

are committed to participating on those kind of coalitions

going forward as well.

Just for the record, we did, Bloomberg, submit a

written response to the Commission staff report dated May 5,

dated June 14th, and I believe that has been made available

to the public as well.

Bloomberg continues to be committed to providing

to our global 250,000 customers energy markets reporting,

whether that is assessments or indices around the world. We

have provided pricing to the energy markets to our customers

for over a decade and will continue to do so, whether our

customers are using those prices in their contracts or

whether they are using them to do historical analysis,

correlations with weather data, futures pricing data or any

other data that\'s commingled on the Bloomberg platform. We

are committed to providing that to our customers going

forward.

Bloomberg has the unique position because we are

a software provider focusing on pricing. And, although this

is not our primary business, as most people know, it is an

important piece of our business and we are constantly being

reminding by our customers that providing transparency,

depth and coverage in the global energy markets is an

important part of why they use Bloomberg for energy and we

continue to want to seriously look at all alternatives going

forward, whether we can use our technology to benefit that

effort or simply continue providing pricing to the market.

In that regard, over 23 years now we have

provided millions of ‑‑ pricing to the global markets. We

will continue to do so for energy and we\'re excited to

participate in this panel today. Thank you.

CHAIRMAN WOOD: Thanks very much.

Mr. Onukogo?

MR. ONUKOGO: Good afternoon. My name is Ernest

Onukogo. I\'m the manager of Dow Jones New Wires Indexes.

Our offices is based in Princeton, New Jersey. I had to

look at my notes to make sure I knew what my name was.

Anyway, Dow Jones, as most of you know, has been

in the index publishing business, at least on the wholesale

side, since late 1995. Prior to publishing our first

indexes, we spent about two years or so consulting with the

industry and putting together a research and methodology for

our initial indexes.

I\'d like to say that our company support our

first efforts to provide transparency to the gas and power

markets. We don\'t currently publish any indexes in natural

gas and our strengths are in the electricity. So we\'re

pleased to be on this panel, although I looked at the

questions that the previous panel had and I wished I was on

that panel instead. So, anyway, we\'re strong believers in

responding to the market\'s need for information. As such,

we are always having a dialogue with the marketplace to

ensure that the products that our company produces meets

their needs.

We feel that it is our responsibility to ensure

that the reliability of our indexes ‑‑ it\'s our

responsibility to ensure that our indexes are reliable

because for us it is vital to our commercial success. We

recognize that FERC\'s responsibilities includes regulation,

investigation and prosecution. One thing we did want to

add, though, is as a result of FERC\'s policy statement we

have fielded quite a few calls from the smaller index

participants. Most of our strengths, as I mentioned, have

been in the West, the Northwest and the Southwest part of

the U.S. and some of these participants have felt like they

did not have the resources to meet FERC\'s mandate.

Our understanding was that FERC\'s intentions

were, of course, to encourage liquidity and we feel that the

activities of these smaller players who are probably not

here today would be helpful in achieving that aim and FERC

can do that by encouraging reporting and to encourage

reporting, just make it easier for them to send FERC the

type of information that FERC needs.

We currently do not feel that there are any new

institutions that need to be developed to overcome some of

our present challenges. We think that the policy statement,

as is, is a step in the right direction with some minor

tweaking that we hope we will discuss sometime this

afternoon.

We understand that as your investigative

responsibilities go, Dow Jones will continue to work

cooperatively with you to make sure that if there are any

price anomalies that that information is appropriately

provided. So that\'s it for me. Thank you very much.

MR. HARVEY: Thank you very much.

Mr. Sansom?

MR. SANSOM: Good afternoon. My name is Richard

Sansom. I\'m the Markets Editor at Io Energy. We\'re the

publisher of a number of different titles relating mainly to

the electricity business.

Io Energy has seen an increase in price reporting

in terms of index participants and trading volumes, though,

there is still a substantial way to go before full and

complete representation of market activity is possible.

Additionally, confidentiality agreements are now being

processed for a number new index participants and some that

had stopped providing data in 2002. There has also been a

change in attitude for many market participants with regard

to collecting price data. With several of the larger

participants now looking to provide data or at least open to

reviewing their position on whether to submit such data.

Much of this progress, initially, seems to be

made with regard to natural gas trading with electricity

data lagging behind. The situation is, however, much more

positive than it has been for some time. Io Energy is

optimistic that once this investigation is completed and the

situation allowance is settle, then the improvement in data

collection will continue allowing a greater level of

confidence in published indices.

With regard to greater transparency, with data

now being provided in an electronic form, Io Energy is able

to verify data more accurately and complete any necessary

audit of index numbers. Although this data is now provided

from the mid office and is processed in accordance with Io

Energy\'s published methodology allowing the index to

withstand robust examination and offering a high level of

transparency, together with the necessary checks and

balances.

Much of the recommendations of the policy

statement have long been applied to Io Energy\'s price

indices, including the exclusion of outliers from any final

index average. With regard to improving transparency, Io

Energy is at present automating some data processes which

will allow us to more accurately to include the number of

transactions in the index. Once this is finalized and the

necessary steps put in place to ensure accuracy, then total

transaction numbers will be included along with all other

data in the published index.

To improve the situation further is a need for a

greater number of trading companies, which are presently not

participating in the Io Energy indices to provide data. The

resulting increasing reported trading volumes will also

enable Io Energy to provide a more accurate and reliable

index in relation to all electricity market activity. With

regard to the standards of the policy statement, Io Energy

is in broad compliance with the policy statement criteria

and with the addition of publishing details of transaction

numbers, we\'ll be in closer accordance with the standards.

Proposals for the use of indices in

jurisdictional tariffs, one of the proposals may exclude

some Io Energy price points from using jurisdictional

tariffs. Io Energy will continue to publish confirmed price

data wherever it is available. Besides Io market

participants, the fullest view of the information available

so that they\'re able to judge for themselves the risk

involved in used reported prices in any tariffs. This would

also allow the use of Io Energy data in combination with

other price indicators or indices in the formation of

tariffs.

In terms of gas indices, although the same

standards are applied to collection and the processing of

natural gas data, Io Energy is, for now, firmly a power

industry publisher that uses gas data predominately to

produce a spread index. In terms of facilitating tariff

compliance, Io Energy looks to interfere with the raw data

as little as possible for providing index users with the

trading volumes that allows potential users to draw their

own conclusions on how representative the prices are and

whether the more illiquid hub should be used in relation to

tariff.

While analysts check all data, Io Energy prefers

to minimize human involvement and avoid any assessed prices.

It is hoped that the increased reporting of trade data and

resulting increasing confidence levels will also improve the

sample size, providing pipelines and utilities with more

options. Thank you.

MR. HARVEY: Thank you.

Ms. Riner?

MS. RINER: Thank you. My name is Bobbette

Riner. I\'m president of Powerdex. I indexed gas for six

months and have been indexing electricity for seven years,

so I\'m glad to see the afternoon panel.

Powerdex is a real‑time wholesale electricity

trading activity within the WECC. We\'re a small company but

we\'re committed to a quality nitch product and we\'re pleased

to be here and appreciate the Commission having us here and,

therefore, supporting a free market by, not only allowing

the competition among energy market participants, but also

amongst the larger and smaller index publishers.

That\'s basically represents our attitude in

building an index. We\'re going for the most comprehensive

one. You can\'t have just the top players running the index.

That, inherently, can lead to gaming and we want to be a

watchdog and help you guys, too.

Powerdex is not big upon relying upon online

trading platforms or one data hub as an index. If the

Commission were to urge relying upon an online trading

platform, that automatically omit some players ‑‑ some

smaller players, those who don\'t qualify, meet the credit

standards and therefore the actual real market is not

necessarily represented.

If the FERC chooses not to be the actual

repository for all the index data, then, we at Powerdex

strongly urge against picking a winner amongst the competing

publishers and also urge that FERC does not designate an

entity whether profit or nonprofit that purports to be

independent, yet, takes funding other than subscription or ‑

‑ license fees from energy companies. Such a practice

unravels the independence that an index publisher must have,

otherwise, the fox is put in charge of the hen house, not to

offend half the audience. Index publishers should be

financially independent from energy companies ‑‑ no BC,

nothing other subscription and ‑‑ fees. And then we the

publishers should maintain the right to fight for that

market share.

Powerdex, I have to concur with my colleagues

here, we\'re seeing additional participation. We all

experienced a big hit in October 2002 when on the first real

threat that people could go to jail for gaming the market

and it was probably a year ‑‑ a really hard year and we

started seeing more participation, not only people who did

before, but also others who had not been providing data

before.

We are going to go out on a limb and say

something kind of unpopular, but I\'m sure it will be held

unpopular. We at Powerdex feel that public policy can be

enhanced overall by the Commission requiring counterparties

to be identified. That way we can do your work. We can

police it and it\'s not just one set of police. It\'s every

index publisher out there. We just feel like we all have

confidentiality agreements in place and obtaining this

information will not give the publishers expressed or

implied permission to publish or otherwise reveal such

information. I understand the concerns, the propriety

concerns, but there is an implication that, if your

counterparty is sending information on your trade, you kind

of have to clean up your act and send the like data and, if

it doesn\'t match up, if there are glitches, then discussions

amongst the three, the publishers and the counterparties can

clear that up and say, oh, well, we were counting apples and

kiwis and we can help police it. Publishers abilities to

match those trades serves as a checks and balances and that

is, I think, mandatory.

As far as the submission of all or none hub data,

we can see the pros and cons to such a practice, but either

way, could we please get it settle quickly and move on with

our lives. That\'s just what we urge. It keeps the data

providers and publishers in a state of flux and there\'s

costly changes on both ends. Also, there\'s a greater

potential for error in delays.

Let me just close. We applaud your efforts in

cleaning up the markets, making sure they\'re stable, making

sure they work for everybody and we really encourage us to

use that carrot instead of the stick approach overall and,

perhaps, educate people, particularly, in electricity where

indexes are not as widespread. However, we at Powerdex are

being used in a number of ways and a couple we hadn\'t

planned on initially. People require this ‑‑ the companies

require this index. The end users require this type of

market intelligence and if the FERC can guide and say this

is how it can happen. Don\'t worry. Things are going to be

fine. It\'s going to go a long way.

We concede there\'s no easy answers for some of

these ongoing challenges, but we cheer you on in your

efforts. Thank you very much.

MR. HARVEY: Thank you.

Mr. Haywood.

MR. HAYWOOD: Yes. I\'m Tom Haywood. (Off Mike).

Sorry. Which is part of the energy intelligence group. I

don\'t have a prepared statement. I\'m the piker when it

comes to this sort of thing, but I will tell you thank I\'ve

been indexing prices since the mid‑90s. I mean, I started

when Bob Epps started. I was in gas. I was at Gas Daily.

I was markets editor at Gas Daily. I worked with Platts

when they took over Gas Daily, inside FERC as well.

I\'m now at natural gas ‑‑ and I can tell you over

the last year we have done remarkable things to reform our

tables to show transactional data. I think our data is a lot

better thanks to your efforts to push in that direction. It

gave me a lot of impetus to reform things and to enhance our

actual use of the data that we\'re getting. That data has

also improved and I tell you it\'s light years better than it

was when I started.

I mean, it\'s an amazing difference to get

information from the back shops as oppose to the traders.

It was more fun talking to the traders. I mean, I enjoyed

my job more gathering prices from people you talk to about

their kids and you knew who was going to the beach and all

this and now really it\'s just e‑mails and it\'s kind of cold.

You miss it but it\'s necessary because, as I was saying at

lunch, when I started daily prices, it wasn\'t that big a

deal. People would use these daily prices when they wanted

to go play golf, but within three years we realized it was

pretty serious. People are making money on these things and

that means there is a temptation to game and, when there\'s a

temptation to game, they mean do you really need to trust it

to the horse traders, you know, behind the phones. So there

really needs to be a filter and just tell them that they can

talk to us about normal market conditions. We don\'t need to

know the prices from them, but I would like to be able to

talk to them about what\'s going on at Drake and why aren\'t

we getting prices up there today.

That\'s it. I would say I\'m very glad to help in

any way I can to assure you that things have gotten so much

better and we are making strides in meeting your needs of

the policy statement. People have called me on the phone

and talked to me about how well we\'ll in compliance. That

we can use in tariffs. It\'s all right here. I just say,

well, if you want to know the average number of deals per

day, it\'s right here. It\'s published. You want to know the

average volumes per day. It\'s right here. It\'s published.

We publish weekly, daily, monthly and bid‑week

prices. Everyone of them, except for the monthly, has

volumes involved. Well, the monthlies are generally the

same as the weekly, so there\'s no point in repeating that

data. We have a lot of historical there. But, in our

monthly prices, we go ahead and publish the volumes. We

publish the number of deals that we got. We don\'t publish

how many counterparties we have in the deal because we don\'t

know the counterparties and God help us if we every did

because my data base guy\'s head would pop right off if he

had to keep track of that, too.

But, if you did require our counterparties, and

we could get counterparties in the deal, I have no objection

to publishing any information which is available because I

honestly feel like these numbers should be as transparent as

possible and so people can make their best judgments as to

how they want to use them or not use them because that

should be their choice. And so, if there\'s anything I can

help you with, please let me know.

MR. HARVEY: Thanks very much.

Mr. Steis?

MR. STEIS: Thanks. Good afternoon. My name is

Dexter Steis, Executive Publisher at Intelligence Press,

more commonly known as NGI. I appreciate the opportunity to

participate in today\'s conference. We\'ve filed detailed

comments in this updating the Commission on NGI\'s progress

throughout the past 16 months.

As a journalist by trade, I\'ll do us all a favor

and keep my verbal comments today brief and focus

specifically on the bullet points listed for this panel in

today\'s agenda. As mentioned in our filings, and as

communicated to the Commission as part of the market price

reporting and action committee, NGI has witnessed a dramatic

improvement in price reporting under the voluntary system.

After receiving 2190 transactions, totalling a

trading volume of nearly 15 bcf for the month of April, NGI

has seen its survey data plateau at a very healthy level of

roughly 1900 transactions and 12 bcf a day of volumes for

the shoulder months of May and June. I\'ve passed out a

handout that outlines that data and the peak and then the

plateau that we\'ve seen in the last two months.

Much has been said over the past six months about

the dramatic upturn in reporting to publishers and today I

have another resource that corroborates that reality. A

quick look at the recently published ranking of the top 20

traders reveals that the trading volume is concentrated in

the top trading ranks, which are dominated by companies that

report to such publishers as NGI and that\'s outlined on page

2 of the handout. Well, the ranking is. This was published

in a recent NGI. It\'s the top 20 ranking by sales in bcf a

day.

For example, the top five trading firms, all who

either report or who have told the Commission, in one case,

they intend to start reporting, account for a whooping 64

percent of the trading volume of the top 20. The top nine

traders in NGI\'s quarterly ranking, either report or, again,

have in one case have told the Commission they to start

reporting, they comprise 80 percent of those top 20 firms.

All tolled, 13 of the top 20 companies are reporting or have

said they plan to report to publishers the total trading

volume of these 13 account for 86 percent of the top 20,

again, illustrating the concentrated nature of the top

trading firms, of the volume of the top trading firms, I

should say.

We bring this to the attention of the Commission,

not because we feel it presents a problem, but rather to

help prove the assertion that publishers are collecting a

very large percentage of the reportable bid‑week and daily

gas markets. Outside evidence that market\'s trading can be

concentrated is seen in the multi‑billion dollar auctions of

U.S. Treasury bonds and bills where 23 broker/dealers do 99

percent of the buying, according to a spokesman for the

Bureau of Public Debt.

Because, however, NGI\'s quarterly ranking of

these sales data includes both reportable and nonreportable

transactions, it is difficult to compare the data to the

nearly 30 bcf a day of reportable price data that NGI

receives across both its daily and bid‑week markets.

However, it does give us a great deal of comfort considering

that the top 20 represent more than 100 bcf a day of gas

sales or roughly 1.7 times the size of the 60 bcf a day

daily consumption figure and that\'s based on the 22 tcf

divided by 265, I believe. So the volumes of those top 20

are 1.7 times that figure. So it\'s certainly a lot of gas

we\'re receiving.

As for market transparency, NGI, in July 2003,

began publishing tiers to delineate the volume levels at its

bid‑week trading location. NGI notes the overwhelming

interest on the part of the market and the Commission staff

to enhance price transparency. Accordingly, NGI plans to

publish volumes and number of transactions for each pricing

point in its daily, week and bid‑week surveys no later than

September 1. And, if the gentleman to the left of me is

pushing for August 1, then NGI might not want to be left

behind. We might be there August 1 as well, so stay tuned

for that.

NGI agrees with the May 5th staff recommendation

that NGI is in substantial compliance with each of the five

areas of the July 2003 policy statement. The staff\'s only

two reservations, it writes, are the issue price

transparency, which I\'ve just addressed and authority issue

of the Commission\'s access to the data.

In order to have a voluntary survey, we have

pledged confidentiality to these data providers for their

proprietary data. We will be willing to explore procedures

with the FERC to cooperate with the Commission where there

is evidence of potential price manipulation subject to our

signed confidentiality agreements.

On the issue of an external audit, NGI is in the

process of soliciting bids and selecting an auditor. Once

selected, this auditor would work with NGI to determine a

set of agreed upon procedures based on NGI\'s published price

methodology.

In closing, NGI would like to reiterate the

considerable improvements under the voluntary price

reporting system. NGI is nearly the full compliance with

the policy statement going forward. NGI encourages the

Commission to chose what\'s behind Door No. 2 and continue to

monitor the status of price reporting. In exchange, NGI

will supply more pricing transparency and continue to

furnish the Commission with monthly updates outlining the

robustness of trading as well as participate in future

conferences here.

Again, I thank the Commission and staff for the

opportunity and I look forward to the questions and answers.

MR. HARVEY: Thank you.

Mr. Vice?

MR. VICE: Good afternoon. My name is Chuck

Vice. I\'m Chief Operating Officer of the Intercontinental

Exchange. Intercontinental operates the ICE electronic

trading platform and the e‑confirm electronic trade

conformation system. Our market data subsidiary, the Tenex

Group also publishes day‑ahead and month‑ahead gas and power

indices based on trade data from these two systems and my

remarks are fairly brief.

Since the release of the policy statement last

year, ICE/Tenex has lead publishers in embracing the

standards, including among other things contractual

commitment to data confidentiality, employee code of

conduct, independent audit, and a transparent, unambiguous

index methodology. In further adherence to the policy

statement, ICE/Tenex began publishing, in addition to

volume, the number of transactions and the number of

counterparties for each index. With regard to data access,

Intercontinental has a long history of cooperation with

regulatory subpoenas received pursuant to market

investigations.

With these key conditions met, Intercontinental

has requested that its indices be deemed in full compliance

with the standards of the policy statement under adoption of

staff recommendations by the Commission.

In late 2003, Intercontinental made another

important improvement to its indices when it began including

non‑ICE trades from its e‑confirm system in the ICE/Tenex

month‑ahead gas indices. Today a total of 66 trading firms

submit over 30,000 gas, power and oil trades per months for

e‑confirm for confirmation. During the most recent bid

week, e‑confirm contributed 18 percent of the transactions

constituting the ICE/Tenex month‑ahead indices. These

transactions included trades executed directly between

counterparties as well as trades executed by seven different

voice brokers.

Intercontinental projects that e‑confirm will

grow to contribute over 50 percent of the transactions

making up these indices by year‑end. Just last month

Intercontinental made a further enhancement to its

month‑ahead indices when it began publishing a bid‑week

indications report at the conclusion of trading on each day

of bid‑week. This daily report provides a volume‑weighted

average at the conclusion on each day of bid‑week. This

daily report provides a volume‑weighed average of price and

total volume by pub of all bid‑week trades executed that day

on the ICE trading platform.

In addition to being an index publisher,

Intercontinental, as I\'ve said, also operates an exchange,

so I would like to make a brief remark concerning liquidity.

Since much of today\'s focus has been on the gas markets,

these remarks pertain specifically to power. In January of

this year, ICE began offering clearing of financial power

trades for seven hubs with another three to follow in July.

These cleared power slots settle on LNP prices at hub, such

as PJM and New York ISO and on ICE/Tenex day‑ahead indices

at hub, such as Palo Verda and mid‑Columbia.

In the last few months, 37 different

counterparties have executed 4000 transactions on ICE and

through voice brokers for a total of 150 million megawatt

hours. These cleared financial power volumes, growing at

over 30 percent per month, now regularly top physical power

volumes.

Moreover, because power markets haven\'t to now

made little use of indices, participants are free to make

fully informed decisions regarding which indices they want

to use. As a result, Intercontinental believes that the

price transparency in the power markets is already well‑

served by proliferating LNP markets and numerous index

publishers in a non‑LNP market. Thanks.

MR. HARVEY: Thank you.

Mr. Foster?

MR. FOSTER: Thank you. My name is Larry Foster.

I\'m Global Editorial Director for Power at Platts. As most

of you know, Platts has been an active participant in this

proceeding for the last year or more and we recently filed

extensive comments on June 14th. I wont rehash those, nor

will I talk extensively about the progress to date. But,

just to summarize briefly, changes that have been made from

a year or 18 months ago.

We now are receiving all data from our company\'s

back offices, certified by officials of that company. We

are receiving transaction level rather than aggregated data.

We have clearly specified standards for the data that we

want from data providers. We have provided much more

detailed public methodologies of how we calculate our

prices. And both we, and the data providers, are now

subject to compliance reviews of their reporting.

On the topic of greater market transparency, for

natural gas we already are providing volumes for all of our

daily price survey and for the Tier 1 monthly points.

Beginning August 1st, assuming we can work through all the

implementation details in time, we intend to provide the

number of transactions as well as the number of volumes for

all daily points and for the top two tiers of our monthly

survey.

Tier 3 are the relatively illiquid points. We

don\'t feel there is much to be gained by showing measures of

transparency for those points. And, under the FERC

criteria, they couldn\'t be used in tariffs anyway. So I

think, basically, that point is moot. One note on the

metrics that the staff report lays out, along with volume

and number of transactions, the criteria used number of

counterparties. Unlike, ICE, which knows the counterparties

in every deal, we do not get counterparties in our press

reporting for all transactions. We get them for some and

Platts has consistently advocated in favor of counterparties

throughout this proceeding, but we don\'t get them for a lot

of the deals that we capture and so we simply can\'t provide

that measure.

In our power survey, we will publish the volume

and number of deals for each daily price that is based on at

least five deals and three sources. As you\'ve heard from

the proceeding speakers, the power market still is

relatively thin and we\'re forced to do assessments at some

of the points that we report. We think that there\'s general

agreement that using a volume‑weighted average price in a

very thin market does not necessarily lead to good price

discovery. We will modify our current standards to rely

more on volume‑weighted averages than is now the case and

our written comments provide more detail on all of these

points.

As Dexter mentioned, participation in the price

surveys is up substantially for the most recent five‑month

period. Our monthly gas survey volumes are up 35 percent

and transactions are up 38 percent compared with the five

months immediately following issuance of the policy

statement. Likewise, transactions and volumes are up in the

daily gas survey and the power survey as well.

Platts believes that all participants or all

market players should participate in surveys. The gentlemen

this morning from AGL cited cost as one reason not to. We

have worked with many, many companies that have had to

implement new systems. That have had to install all kinds

of internal controls as, indeed, Platts has. We have

increased our compliance staff from one to three. We have

spent considerable time and money to improve our technology

over the past year. We have incurred substantial legal fees

throughout this process.

We feel that incurring these types of costs is

simply the price you pay for transparent markets and that

companies should be willing to pony up.

As we have said in writing since January, we

believe that we meet the policy statement standards. The

second key question, along with the increased market

transparency posed in the staff report, is on access to

data. We have a standard confidentiality agreement that

Platts attorneys developed. We also have signed the SUCA

agreement developed by the CCRO with a number of companies.

Both of these cover the eventuality that the government

makes a request of us for disclosure of data.

Since this staff report was issued, we have had

discussions with FERC staff about this issue of access to

data. Those discussions are ongoing. It\'s an active topic

of debate within MacGraw‑Hill and we continue to hope that

we can reach some sort of agreement with the Commission on

this issue.

We would encourage you not to phrase the question

as starkly as \"will price index developers provide FERC with

access to data in the event of an investigation?\" The

answer simply is it depends. In my mind, that question is

akin to saying to a pipeline will you accept our decision on

the justness and reasonableness of your transportation

rates. I don\'t know. It depends on what you put in front

of me. So we feel we simply cannot sign a blank check, but

we certainly hope to be able to cooperate with the

Commission on this.

I also might note that we have worked voluntarily

with Mr. Gorman\'s oversight staff at the CFTC regarding

data, a number of NYMEX basis swaps settled against our

prices and the CFTC must assure itself that those points are

valid and liquid and I think we have tried hard to provide

that division of CFTC with information it needs.

I\'d like to talk just for a second about

technology. In a recent interview in Energy Risk magazine,

Chairman Wood called for \"a 21st Century approach towards

price formation. One that doesn\'t require a lot of faxes

and phone calls and the old technology that we still have in

the gas sales industry. A whole lot of business depends on

a few flimsy pieces of data that come out of every data

market.\"

I\'d like to assure the Chairman and the

Commission that that simply is no longer the case. Platts

does not accept data by phone call. There may be a few

isolated, kind of emergency cases where we accept prices by

fax, but virtually all of it is submitted electronically and

imported directly into proprietary data management systems

that we have developed. We are in the process of beta

testing a web‑based data submission system that would allow

providers just to go a website and dump their data in

directly so that we don\'t have to rely on e‑mail.

Platts, in other markets, such as oil in

Singapore, has tested electronic platforms as a data

collection system, not to trade on, but simply as a means

for us to collect data. So I feel that we are in the 21st

Century in our technology and I\'d also like to emphasize

that in our daily price survey we now are collecting more

than 2000 transaction these days. So it is not based simply

on a few deals. With that, I\'d be happy to take any

questions.

MR. HARVEY: Thank you.

I\'d like to start by asking this question. It\'s

apparent a lot of work has been done on part or a variety of

these things. One of the issues that was important to us

and remains important is clarity around the methodology and

that\'s really to give information to those people that make

use of your information in an effective way.

I haven\'t done a real careful look and so I\'d ask

this question of, I think, many of you. Perhaps, not Mr.

Vice because I don\'t think he does this. But, in many of

your publications there are both indices in the sense of

these kind of spot electric and gas indices and there are

other assessments of price, maybe foreign prices, other

things. How would I, as a reader, and would I, as a reader,

be able to distinguish very clearly between times when

there\'s a very specified kind of methodology around an index

versus when there\'s a lot more assessment to it and what

would I need to look at and it is clear that there is a kind

of difference there in terms how they\'re calculated and how

they\'re figured? I know there are assessments that are

made. They\'re used as part of the journalistic exercise.

Is it clear? Can I tell just sitting down with your

material? And maybe just start with Larry and work our way

back down here.

MR. FOSTER: Sure. In our daily gas survey, our

methodology is such that we do not do assessments. For

better or worse, we report a mid‑point based on the volume‑

weighted number regardless of how limited the volume. For

our monthly survey, yes, we feel it\'s clear. If we\'re

performing an assessment, there\'s an asterisk next to the

number that is reported and you go to a footnote and it says

this was done using an assessment methodology. We have

details, separate power and gas methodologies posted

publicly on our website that go into excruciating detail on

the differences between volume‑weighted indexes and

assessments.

In our power survey, we do do a number of

assessments. Those are recognizable because they have no

volume number attached to them. When we begin reporting

transactions and volumes August 1st, we will be revamping

our price tables, so it\'s possible that in a month or two

they may look slightly different, but we are very sensitive

to this need to carefully distinguish between the two.

MR. STEIS: NGI, too, does not do assessments in

its daily gas price index. In its weekly gas price index

and, in bid‑week survey, we did resort to the use of

assessments during the market dip that we saw in late 2002

and early 2003. I believe we had a six‑month period where

we posted assessments and marked those prices with an

asterisk and that was detailed in the footnote and I don\'t

have the information in front of me, but I do not believe

we\'ve published an assessment in the last six months with

the robustness of trading volume that we\'ve seen.

COMMISSION PERLMAN: Can I interrupt and just ask,

just for clarity, do you ever publish sort of regular price

information that you do not consider an index? That is

something else. That\'s some sort of price indication for,

let\'s say, electricity for January of \'05 that\'s not an

index, but you publish it regularly and is that true, first

of all? And, secondly, if it is, do you distinguish in your

documentation that that is a journalistic assessment or some

other price indication, but does not have the same level of

rigor that an index would have?

MR. STEIS: I can jump in on that real quick. We

do publish a bases survey in our bid‑week survey that takes

in all the physical bases transactions that we\'ve received

during the last three‑day settlement period. And, while we

do not publish assessments in that chart, I can honestly say

that it is not clear from the footnote that that is the

case. So I think in this case maybe a little bit more

clarity in that footnote of that table is called for.

MR. FOSTER: We do report forward prices, for

example, for both gas and electricity, which are

assessments. Our methodologies, again, clearly indicate

that that what they are. In terms of the presentation, the

table headers do not use the magic word \"index\" which has

kind of taken on this connotation of a volume‑weighted,

quantitative type number as opposed to a journalistic

assessment. So I feel that they\'re clearly differentiated.

This was one of the questions posed in March. I don\'t think

there was any comment really submitted that said it wasn\'t

clear to industry participants.

MR. HAYWOOD: Mine will be a short answer. I

mean, basically, you know, when we do an assessment because

we have very limited information, what we do is we publish

the number, but we put no transactional data. It\'s

indicated by ‑‑ all transaction data is marked out so that

we\'re showing that this isn\'t really based on the same level

of activity that we would actually publish a number against.

We do have one table, we do a citygate table

during bid week where people do not actually trade at these

particular citygates, but they\'re based on well‑known

tariffs and such. So those are all assessed values, but

that\'s more informational than anything. You know, it\'s

kind of interesting to see where Austin, Texas is going to

land at a price based on the transport from, you know,

blank. But I don\'t think anyone is actually trading on

that, but, to answer your question, we wouldn\'t but

transactional data against that.

MS. RINER: When I created the first hourly

indexes in the country, I set up a methodology that request

assessment ‑‑ no, well, it requires fake pricing in some

points. It\'s called indicative pricing. No trades are

reported. There\'s no trades garnered for that particular

hour because we\'re talking about 24 hours in a day at

sometimes illiquid hubs. We learned quickly from traders

that we can\'t just put zeros up there. We have to have

something. We did not know this. I\'m at another company

and that is the part of the methodology that kept the same,

but, ironically, we are forced to use some assessments now

as a result of all this focus, the Commission\'s report last

summer and the way the things are falling out in the

industry, we have found that our providers are very

reluctant to provide indicative pricing. We had a set

methodology. We used the tightest bid ‑‑ spread by

obtaining that for the hours that we required from different

players and now no one will provide that. So we have

developed a proprietary formula based on various factors,

but we have always clearly indicated that this is zero

volume. We\'ve always shown volume. But that\'s the only

assessments and I hate to do assessments. We\'ve being

forced to. I\'ll take any feedback. Thank you.

MR. WEIGEL: Just from Argus perspective, in

terms of our hourly indexes in our published methodology, we

describe exactly where prices are assessed versus their

generated calculated indices and our hourly indexes that we

publish, the volume for the particular hour will be

indicated as zero and described in the footnote in the table

that the information, again, is an assessed value. It has

no volume against it. Actually, the color is also

different, a different color, but in case those are being

printed out in black and white, there\'s a zero next to it.

So it is very clear.

I would also just toss out there, I\'m sure we

don\'t want to spend significant time on it, assessments, I

don\'t believe are a bad thing and I\'ll leave it at that

point.

MR. SANSOM: I just wanted to say that within the

indices we don\'t actually publish assessments, but they will

be referred to in any editorial commentary that\'s gone on

with the markets. But, generally, in indices there\'s no use

of assessments.

MR. ONUKOGO: For the Dow Jones indexes, we

always publish a price and a volume. So, any time there\'s a

volume associated with a number, our readers knows that

there were physical transactions that occurred at that

particular index point. If there were not any transactions

reported, then we will use an assessment price and we will

indicate that by putting an zero of volume and there\'s a

footnote at the bottom so people know that physical

transactions did not occur at that level.

MR. MOCEK: Good afternoon. I wasn\'t here this

morning. My name is Gregory Mocek. I\'m Director of

Enforcement, the CFTC. I know I\'ve had a dialogue with some

of you over the past couple of years.

Before I ask my question, which is going to be

directed towards access to data by the government, something

near and dear to our heart, I want to commend the FERC,

under the leadership of Chairman Wood for doing a quality

job in not only exposing the problems that existed in the

price reporting area, but also fostering a dialogue between

private industry and regulators. I don\'t think there\'s a

better way than a forum like this to figure out exactly

where we can come to a solution that will not have

detrimental impact on industry.

With regard to access to data, FERC and the CFTC

have jointly done, probably, in access of 50 false

reporting, manipulation investigations over the past two

years. During those investigations, we have routinely

shared information through access letters and done what

we\'ve needed to do to cooperate with the Justice Department

and the other members of the President\'s Corporate Fraud

Taskforce.

In the process of attempting to gather the

information to figure out exactly whether our statutes were

violated, a number of companies that are here today had

decided to sort of privileges under the privileges that are

possible, specifically, journalists privilege with regard to

information requests that we made on the data that was

collected by certain companies. As we sit here today, the

larger question, I think, is index providers collect

information every day that affects citizens in every state

in America. It affects the pocketbooks of consumers and I

would like to know the downside of allowing criminal and

civil prosecutors unfettered access to the information that

you collect without assessing a privilege upon that

information. I\'d be more than happy to take the answer from

anyone.

Mr. Foster, would you like to comment?

MR. FOSTER: Mr. Mocek, as you well know, our

company is in court with your agency. I\'m not accompanied

by counsel here today and I\'m not prepared to answer that

question on my own.

MR. STEIS: Without the confidentiality

agreements that we\'ve signed with our data providers, there

would be no data and there would be no survey. We\'ve signed

our own confidentiality agreements. We\'ve also signed the

DSUCA and that specifies that, if we are to turn over data

to a governmental agency or in a subpoena, we are bound to

notify the company and have that company use any protective

measures that it may use to keep that data confidential.

We are willing to work with the Commission on a

set of procedures that would allow us to uphold this

confidentiality that we have with our sources, while

cooperating with the Commission and the CFTC to monitor the

market and I\'d be interested to have meetings with the CFTC

and the FERC to discuss what those procedures might be.

MR. HAYWOOD: Again, this is Tom Haywood. You

know, that\'s an interesting question and we do wrestle with

this. We talk about. I mean, because ‑‑ and I know you\'re

not talking about fishing expeditions. I mean, you\'re not

saying you just want to come in and take a look at all of

our stuff and see if you see anything that\'s unusual or

something that draws something to your attention, which is a

huge difference from your coming to us and saying, you know,

I believe that Company X has been manipulating data for

purposes of doing this and we want to see what they\'ve been

reporting to you as opposed to what other people have been

reporting.

It\'s a whole difference. I\'m sure there\'s

something that can be ‑‑ some procedure that could be put in

place to sort of codify exactly what constitutes a

reasonableness. I mean, you can\'t just say, no, we can\'t

give you anything because of these protections because that

wouldn\'t fly any in case, especially, if it\'s a criminal

situation where a person is criminally liable for fraud or

something. So, no, we wouldn\'t be hard fast against some

sort of procedure, but we\'re with Dexter. We\'d kind of like

to talk about what exactly ‑‑ what constitutes

reasonableness. What exactly are you all looking for, under

what conditions so that we can cooperate.

MS. RINER: We would like to see written

guidelines for, as Tom said, what constitutes reasonable

suspicion or probably cause to launch such an investigation

and the compelling reason for Powerdex\'s confidential data

to be compelled. Powerdex will submit, if compelled, but we

urge you to, instead, give us a bit more leeway in helping

you police by mandating counterparties.

MR. HAYWOOD: Can I ask one question? What

Dexter was saying is a very good point. We have agreements

with people and part of those agreements almost always

stipulate that, if we are to turn over information to an

agency for some sort of investigation, we have to tell them

about it before we do that. I don\'t think we ‑‑ I mean,

then they could do what whatever they want, but then we turn

it over, but we have to notify them. I mean, that would not

be a problem, would it?

MR. MOCEK: Well, in certain situations it would

be a problem, but the overarching issue is not informing the

target that we may be looking at, although, in certain

situations, indeed, that can be problematic as you could

might imagine. But, just failing to turn over the

information when you receive a subpoena because the

confidentiality thing exist now at exchanges where they do a

fine job at maintaining the confidentiality of the thousands

of companies that trade or thousands of individuals that

trade upon their platforms and/or their exchange. So I

could see that it would be fairly easy to figure out a way

to cooperate in giving us access to the information when you

receive the subpoena.

MR. HAYWOOD: I think it would just be helpful if

we worked out guidelines so we would understand. We all

could agree that, yeah, this work or show us exactly what it

is.

MR. STEIS: Can\'t the CFTC get the data from the

company?

MR. MOCEK: If the company maintains the data.

MR. STEIS: Under the policy statement, isn\'t the

company required to maintain the data?

MR. HARVEY: You may not be aware of our policy

statement.

MR. MOCEK: No. I am aware of the policy

statement and I\'m not going to speak to the policy statement

because I think FERC\'s better off speaking to the policy

statement. But I can tell you from the CFTC Division of

Enforcement\'s perspective, there was a lot of data that

wasn\'t available by the companies or that was deleted by the

companies or that the companies simply didn\'t maintain or

somehow lost. It would have been much easier if we had

gotten it from the index provider rather than going to the

companies and searching through 50 companies for the

information.

I can tell you a lot of taxpayer dollars were

lost in doing that. Millions of taxpayer dollars were lost

in searching for information as we did these investigations

because we had to spend countless man hours and woman hours

figuring out exactly what information was left and then

trying to somehow extrapolate that information to figure out

what else was possibly report and/or false reported.

MR. STEIS: So these are past abuses?

MR. MOCEK: Correct.

CHAIRMAN WOOD: Just keep in the mind the

question that Greg asked was not about confidentiality

agreements, which are not unusual among participants in the

business world that have the type of provisions that you\'re

talking about. That\'s something that the government deals

with all the time and private parties deal with all the

time. The issue he asked about was, why do you think it\'s

appropriate for you to raise the fences that those private

parties don\'t because they don\'t have available to them with

respect to things like the journalist authority to protect

its sources type of thing in this context I think is what

he\'s asking. You want to put yourself, and maybe you have

good reasons, but that\'s your judgment, in a special class

that other parties to confidentiality agreements don\'t have.

So I think the confidentiality agreement is really sort

beside the point because that is not uncommon at all and

those provisions are relatively standard. It\'s really

saying that these organizations have a special status and

the information sharing with the government should be

addressed different because of that special status. Is that

fair?

MR. MOCEK: Uh‑huh.

MS. RINER: Excuse me, but media, historically,

has not has special privileges. I don\'t get where we get

that and I\'m not sure why we would be compelled to squeak ‑‑

well, I know in the past the companies did not have to keep

their data or they obviated the issue, but we have been

committed to keeping the data and I think there should be

conventional procedures put in place, just as we\'re working

on here, but the burden lies with the companies.

MR. JOHNSON: In Bloomberg\'s June 14th letter

submitted to the Commission, we addressed that issue

directly. I just want to read that into the record.

\"Bloomberg offers a standard confidentiality agreement to

market participants that wish to contribute trade data.

That agreement includes a provision to allow the Commission

to access data otherwise deemed confidential.\" And,

particularly, that provision currently reads as follows

\"such confidential information may be disclosed by recipient

to state or federal courts upon their order or to state or

federal agencies, including FERC, upon their request,

provided in either instance the prompt notice of such order

or request is given by recipient to disclosure if such

notice is legally permitted.\"

And then following the Commission recognized that

Bloomberg satisfied this condition and it commented in the

May 5th report Bloomberg states more affirmative that the

standard confidentiality provisions of its agreement permit

Commission access to confidential data upon order or request

and notice to the effective date of provider.

MR. HARVEY: Yes, Larry?

MR. FOSTER: I would just like to make a couple

of limited comments. I think contrary to what a lot of

people may believe, Platts has not resisted every subpoena

we have received. We have received a number of subpoenas

from this agency, from Mr. Mocek\'s agency, from the Justice

Department. We have done our best to cooperate with those

agencies and to provide what information we feel we can. We

have litigated those cases only when we felt it was

essential.

Our parent corporation\'s business model, the

MacGraw‑Hill\'s company business model is based on being a

publisher and based upon the protections from liability

suits that come with being a publishers. So, if you want to

ask, well, what makes us a special class? That\'s it. We\'re

a publisher. You know, Dynegy or El Paso or whoever isn\'t

and I don\'t believe ‑‑ I\'m not an attorney and I\'m probably

going out on a limb here, but I don\'t believe the legal

standard for obtaining data from a publisher is whether you

can get it more easily from us than you can from some other

source.

MR. GORHMAN: I agree with that point, Larry.

One other thought that I had is that there may be

instances in the course of investigation where it would be

useful for an agency to compare data that is obtained from

the company with data that is submitted to an index

publisher to determine whether they\'re essentially keeping

two sets of books. Keeping one thing on their books that

they provide to us, but actually reporting something

different in terms of investigating a potential false

reporting claim.

MR. FOSTER: And one further point, as I said in

my initial statement, we have talked with FERC staff since

the staff report was issued, before the FERC staff report

was issued and we will continue to talk with FERC staff

about access to data in a limited investigative context.

Mr. Mocek\'s question, I believe, was about publishers

providing \"unfettered access.\" I think that\'s an entirely

different issue.

MR. MOCEK: We are in litigation with Platts and

I\'d rather not get into a specific dialogue about our issues

with Mr. Foster. I don\'t think it\'s proper, but I can say

that I, as well as the Division of Enforcement, CFTC, are

firm believers in the protections outlined by the 1st

Amendment. But, when it comes to price discovery, the

protection of speech should not outweigh the integrity of

the marketplace. And, when I say \"unfetter access\" I mean

unfettered access in response to a government agency or a

government department that has nationwide subpoena authority

given to that institution or that body by Congress and

that\'s what I meant by that.

I appreciate the dialogue. I think it\'s healthy

and I think it lays out, not only our positions, but your

positions and I understand that confidentiality is paramount

because that\'s where your business lies and we understand

that. We completely understand that and we\'re more than

willing to work with you to make sure that confidentiality

is maintained in all circumstances.

CHAIRMAN WOOD: I\'d like to take advantage of

this group for a topic that came up this morning. In light

of several of you, not every one of you, dealing with other

commodities. The point about the uniqueness of natural gas

came up. I\'d be interested if you have any observations

about whether you find natural gas to be more unique or more

similar to other commodities that you cover, whether energy

or others? Does anybody have a comment to make on that?

Tom?

MR. HAYWOOD: Well, natural gas doesn\'t seem

rational sometimes.

(Laughter.)

MR. HAYWOOD: You always say energy intelligence

is an oxymoron there, but it\'s a ‑‑ I think natural gas

tends to, and I believe it has to do with a lot of

commodities. It often trades on what people thinks going to

happen as opposed to what happening. Maybe more so than

some other commodities, which increases the volatility. I

mean, you\'ll be trading incredibly high prices because

there\'s going to be shortages down the way, which may or may

not occur because prices were so high now. It\'s just one of

those things. Of course, you can say the same thing about

oil, but oil just seems more concrete and it seems to have

more firm bearing on its pricing than sometimes I see in

gas. But I\'ve seen some weird things in gas prices that I

never would have thought possible, but they\'ve happened.

CHAIRMAN WOOD: Yes, Mike?

MR. WEIGEL: Clearly, one of the commodities

that\'s not in the spotlight in terms of this sort of

climate, but in the spotlight in terms of price volatility

is the coal markets. So, when you\'ve been sitting around at

\$23 a ton for 30 years and you\'re at \$66 a ton in a matter

of six months, that generates a lot of attention. The coal

markets certainly act very differently from natural gas, but

the ways in which the coal markets are priced, assessed or

indexed, certainly, are remarkably differently than nat gas.

So, perhaps, coal being a market that will have a little bit

more visibility with this organization at some point, but

right now I just thought I\'d offer that as a market

observation.

MR. O\'NEILL: Do you think that the coal price

followed the gas price up?

MR. WEIGEL: Pretty much, the coal market

dynamics have been very much a supply situation. So,

certainly, the coal markets were stressed by the fact that

natural gas became a very expensive fuel and it became

economic to search for coal supplies that were a lot more

economically cheaper. Coal is enormously complex and the

transportation components of it don\'t make it a simple

answer to give you. But, certainly, the price changes that

you\'ve seen in coal have, to a large extent, been driven by

forces that are even outside of this country, the growth of

China, the freight market for transportation around the

globe. So we\'re no longer just an isolated little island in

the coal markets right now. We\'re very much driven by

international forces with natural gas included.

MR. HARVEY: I\'d like to follow up on another

issue that came up earlier and I\'ll start by apologizing to

Mr. Vice. It\'s another one that\'s not really relevant to

ICE, so I will ask a quick ICE question, which is, was I

right this morning? Can people get into Tenex and get the

daily e‑mails still.

MR. VICE: Yes. It\'s pretty broadly available.

I think about 7000 people get that every day.

MR. HARVEY: I just wanted to be sure and ask you

a question. The question I have relates to what several

folks pointed out. Without counterparty information, you

can\'t really give participant information in indices as we

mentioned and we probably didn\'t think that through and we

weren\'t completely clear about that in the staff paper. Let

me ask you a different and specific question. Would there

be a problem or would you foresee problems in publishing

information in areas about numbers of sources?

MS. RINER: I\'d like to take that, if I may?

MR. HARVEY: Sure.

MS. RINER: That is a big concern for us in our

nitch market where we\'re covering the hourly indexes. It\'s

of some consideration. It\'s not as though it were a problem

to build in the variables to display that. Our concern,

overall, is with protecting our participants identities and

we don\'t want to unmask them in any way. Now the hourly

indexes, inherently, are physical. There\'s no paper trades

in there. You can\'t protect people by all this great volume

you\'ll see in the dailies. It\'s energy.

We\'re talking about in the West some kind of

esoteric hubs. We have clients who require them and we have

some people doing load falling. They\'re just buying a few

megawatts for a few hours out to keep the lights on,

basically, and we\'re concerned with identifying the number

of participants and hope we can get some kind of guidelines

here that will allow us a bit more leeway such as to number

the participants in a quarter, say, but just say the number

of participants for each hour ‑‑ I mean, you\'re going to

say, oh, that\'s so and so with so and so. That unit was out

or they were testing another unit or what not and we\'re

really concerned about that. So, in fact, we have complied

with everything except that and we\'re not sure how to deal

with it without hurting the market by unmasking

participants, so we appreciate your feedback on that and

suggestions.

MR. STEIS: So the idea would be we\'d publish

volumes, number of trades and then number of participants?

MR. HARVEY: Yes, sort of separate participants

in any particular area to get at, again, that sense of are

these a lot of trades by two people versus are these a lot

of trades by 10 people or whatever.

MR. STEIS: Yes. NGI has no problem doing that

if the Commission were to suggest it.

MR. HAYWOOD: You know, again, though, that can

be so misleading. Let\'s say you have two major players,

say, in the Chicago market where you had the utilities out

buying and you\'re getting 20 reports from two utilities, but

they\'re also dealing with 10 counterparties each. So,

actually, you\'re dealing with trading from sources that

might amount to 22 sources, but you\'re only to put two down

there because those are the only two you can actually verify

are behind these deals. So it\'s a little misleading. Now,

if you did counterparty ‑‑ if you insisted that people do

counterparties, then we could cross‑match and say there are

14 participants in these transactions and that would be a

more valuable indication of where that is. But, of course,

if you\'re going to publish the number of transactions and

the total volume at the point, it\'s still going to give you

a relative idea about the liquidity of that trading so that

you would know that you may have 100,000 volume, but it\'s

really one deal or three deals that comprise that or 20

deals that comprise that. But, unless you did

counterparties, it would be misleading.

MR. O\'NEILl: Let me ask this. Have any of you

considered doing buyer and seller Herfendahl indices?

MR. FOSTER: No.

(Laughter.)

MS. RINER: Do you mind repeating that one word?

MR. O\'NEILL: Buyer and seller Herfendahl

indices. They\'re a weighted average of the ‑‑ in other

words, you\'ll have big traders that will show up as very

large Herfendahl indices. And, if you have concentration on

the buyer\'s side, they\'ll show up. It\'s a single index, so

it doesn\'t indicate exactly how many buyers or how many

sellers, but it weights them by the volume that they\'re

selling and that\'s what we used in anti‑trust analysis and

in market analysis here all the time to see whether or not

the market is competitive.

MS. RINER: That would help compensate. I used

to cover the dailies and the forwards, I guess, at Synergy.

We needed that there, you know, seeing both ends of the

spectrum. In the West, where you have a couple of players

per hour and a really off peak hour, a real esoteric season

and then at Synergy we had two players notoriously, probably

80 percent of the time, doing massive volumes, massive

volumes and no one else wanted to enter in and they could do

it on an online platform. They could do it wherever they

liked. Well, CFTC went after one and the other no longer is

in business, so I\'ve seen both ends and, perhaps, that would

be one way to compensate for a trading activity where there

are others who either cannot or don\'t need to participate or

they are intimidated because there are two people playing in

volume.

MR. O\'NEILL: And there\'s no new information you

need to make those calculations. You have all the

information.

MS. RINER: Love it.

MR. ONUKOGO: We\'d like to concur with what Tom

Haywood said, actually. For us, we believe that publishing

price in volume and high loads and the number of

transactions is a good idea, both for the number of

different counterparties. We\'re not 100 percent sure we

completely understand what the logic or how relevant that

information is, for one.

The second thing for us is it would be difficult,

once again, without getting counterparty information on all

our transactions to be able to give the public the accurate

number of how many different counterparties were involved in

that transaction.

MR. MOCEK: How do you ensure the integrity of

your index without requiring counterparty information?

(Laughter.)

MR. ONUKOGO: I assume that question is for me to

answer. Correct? There\'s a couple of ‑‑ I mean, without

going into extensive detail on how we publish indexes, we

begin every single day by having an idea of where the market

is, not necessarily where the index is going to settle, but

where the trading ranges are for any particular hub, whether

it\'s an on‑peak or off‑peak data. And we isolate prices

that are outside that particular trading range or prices

that are even within that trading range that have extensive

volume. Now we go out and confirm anything that\'s an

outlier. And, if, for some reason, we\'re not able to

confirm a particular price, then we will not use that price

as part of the index.

And one important thing that\'s a concern for Dow

Jones is also double counting. We\'ve been at several WSPP

meetings where we\'ve been arguing extensively to have

counterparty information supplied for the indexes. We were

at a situation where almost like 80 percent of all our data

participants were sending counterparty information until a

couple of developments happened down the line where some

companies were concerned that there may be violation of

certain agreements. So, as a result of that, we now just

use one side of the transaction. And we think that, in

terms of trying to assess liquidity, that we\'re able to get

counterparty information. Dow Jones, in particular, will be

able to publish ‑‑

CHAIRMAN WOOD: I\'d like to ask a question about

that. We were told this morning, and we\'re told all the

time, that if we were to require or to say that to meet our

policy statement goals counterparty information was required

people would simply choose not to report and you would see a

big drop off in reporting and it seems like you\'re asking us

to require people to give you information you\'d like to

have, but you might have the consequence of losing a lot of

information, which seems to me to be a bad thing.

Secondly, I\'ll just point out that with respect

to your confidentiality agreement issue, I know that that

the EEI master agreement group has put an optional agreement

that\'s standardized on their website made available for

everybody a standard of provision to the EEI agreement, at

least, that I would think would work with any master

agreement that would permit the information to be provided

without any problems with confidentiality agreements. But

that\'s for your information.

We were told again this morning don\'t go near, in

response to Ted\'s question, don\'t go near counterparties

because the information well is going to dry up. Is that

not something we should pay attention to?

MR. HAYWOOD: I never said you needed to do that.

I mean, I was just saying to if you want the number of

counterparties ‑‑ I mean, if you want the number of people

participating in transactions, you\'d have to get people\'s

counterparties and I don\'t know. I\'m kind of in agreement.

I don\'t think it\'s necessary and, if it\'s something that\'s

going to hurt price reporting, I wouldn\'t bother because it

isn\'t a terribly relevant number. It\'s more interesting

than anything else.

And I just want to go back to the weighed

averages and using both sides of a transaction and not being

able to wash one out because you know who the counterparties

are and matching. Like I said, I\'ve been doing this for

many years and I\'ve seen them where you did and you didn\'t

and really it washes out. It pretty interesting how it

doesn\'t really seem to have that big an effect and I believe

there are exchanges that do wash out. That don\'t use both

sides of it and, if you look at their numbers and our

numbers at the larger ‑‑ you know, at points, they\'re really

pretty identical. So it doesn\'t really have an effect. We

learned very on that it washes out. It\'s okay.

MR. GERARDEN: May I follow up on that with Larry

Foster in particular because that\'s Platts pre‑conference

comments, you finished up by saying that you support

provision of counter‑party data. How do you see the

balance, if the Commission were to require that to be

provided in a voluntary reporting scheme, how do you see the

balance between the value of the counter‑party data to the

publishers versus the risk of losing participating?

MR. FOSTER: It\'s a good question, Dave. It\'s a

balancing act and we\'re trying to walk a very fine line

here. You\'re right, Platts has consistently said that we

advocate providing counterparties. Getting back to Mr.

Mocek\'s question about how can you be sure or how you have

the highest confidence in your indexes without

counterparties. I think we consistently have said having

counterparties would give us the most confidence in our

indexes. We\'re in an environment where there\'s a lot of

competing considerations that have to be made here and we

would like within a voluntary price reporting system to see

companies step forward and provide us counterparties. But

we also believe that what you heard this morning is true.

That, if you went to a mandatory structure and required

reporting of counterparties, that it would be

counterproductive. That fixed price steelmaking would dry

up. That everyone would index. That indexes would be based

on very little data and it would be not a good solution.

So the answer is just we\'re trying to balance

what we\'ve got to work with as best we can.

MR. GERARDEN: And the balance you see there is

would be best for the Commission to urge voluntary provision

of counterparty data as opposed to making it a requirement?

MR. FOSTER: Yes. Absolutely.

MR. ONUKOGO: Yes. We agree.

MR. STEIS: And just to add to that, time is on

our side. I think that we\'ve come a long way in the past 18

months to the low point in November of 2002 and all the

transactions that we\'re now receive are coming from a main

or back office, signed off by a corporate risk officer.

They are coming in Excel spreadsheets. The data is all

provided and I think that going forward as these companies

get comfortable with that procedure, get comfortable with

the confidentiality agreements that they\'ve signed with the

publishers that they might and they may warm to the idea of

voluntarily submitting counterparty data, but I don\'t think

that they\'re ready yet and I think it would come at the

expense of the survey data that I\'ve outlined in my original

comments.

MR. HARVEY: I have one last question. We\'re

going a little bit long on time, I know, but my last

questions, which, again, I don\'t think it applies to ICE.

Say I was in the business. Say I wanted to report

electricity and gas prices to all of you and I did it

through my mid‑office, my back office and I generated a

report, would I need to generate eight different kinds of

reports to report to all of you or could I do something

generic and send it to all of you?

MR. STEIS: I can jump in on that real quick.

NGI recognizes that these data providers may and should be

reporting to more than one index publisher and, because of

that NGI makes no specifications as to the arrangement of

the data within the e‑mail or the spreadsheet. We only

require that the fields consistent with the FERC policy

statement are there ‑‑ the date of transaction, the volume,

the price, the date of flow, but we don\'t have any

specificity as to the arrangement of the data.

MR. HAYWOOD: Agreed.

MR. WEIGEL: Agreed.

MR. FOSTER: Actually, Platts does have a

requested format that we\'ve worked long and hard with

companies to follow. When you\'re dealing with masses of

data, it helps to have a standardized format. Having said

that, we would never reject anybody\'s data because it did

not fit our format.

MR. HARVEY: Well, if I\'m hearing correctly, if I

used your format, I could send it to Russell in the same

format and that would be okay with you, too? Okay.

MR. GERARDEN: At the risk of going a little long

on the panel, this morning we heard from the first two

panels some concerns about suggestions in the staff report,

the recommendations to the Commission about minimum criteria

for an index to be used in jurisdictional tariff and one of

the concerns raised was measuring, over some historical

period, an index\'s context of a number volumes or number of

transactions. If the Commission were to adopt some

standards for indexes to be applied in jurisdictional

tariffs, would index developers be able to provide

historical data that you have, perhaps, you may not have

published it but you may have the data. Would you be able

to supply historical data for purposes of testing indices at

index trading points against criteria the Commission may

adopt?

(All agreement.)

CHAIRMAN WOOD: Okay. Thank you very much. I

think we\'d just like to switch over into the fourth panel

and keep going here. So, if you could just take a stretch

and get the panelists changed. Thank you.

(A short recess was taken.)

(PANEL FOUR)

CHAIRMAN WOOD: To the extent problems continue

around price reporting that they\'re largely reflective of

the broader liquidity problem and we want to solicit some

opinions and insights on that broader question and that\'s

what we\'ve invited this panel to address and we do

appreciate your coming and we will begin on that.

Steve?

COMMISSIONER HARVEY: Let\'s go ahead and get

started with Mr. Martz:

MR. MARTZ: Thank you. I\'m Martin Martz, Manager

of Compliance for BP America, Northern American Gas and

Power Business Unit which oversees natural gas, power and

natural gas liquids trading and marketing in Houston. I

want to thank you for the opportunity to be here today. I

thought I would start in part of my overview remarks, first

of all, to address what, from a trading perspective, the

concept of liquidity entails and it\'s fairly simple from a

trading perspective. It indicates that there are ‑‑ a

liquid market would be one where there are a number of

buyers and sellers such that a trader is able to exit his

position and a deep liquid market would be one where there

are a large number of buyers and sellers and it\'s important

that you have both buyers and sellers in the market, not

just a group of buyers and one seller or a group of sellers

and one buyer. You need a combination for there to be a

liquid market. I think, also, it\'s important to recognize

that liquidity and price reporting do have a relationship.

The relationship I would suggest is that liquidity supports

a strong price reporting scheme and provides confidence in

the prices reported.

I think, as you have heard earlier, when you talk

about those points at which there are not a lot of

transactions, price reporting agencies do not have as much

confidence in the price and turn to assessments. A liquid

point, on the other hand, would have a number of data points

that the price reporting agencies could rely upon in order

to develop a better price.

I think also that over the last several years

there have been a number of factors that affected liquidity

and credit is one of them. The Eron‑related factors would

be another. You saw those two kind of combine together to

take a number of folks out of the trading market, the

Williams, the El Paso, due to some extent, Aquillo. And, as

those folks have left the market, there have been fewer

parties there who have been willing to be on both sides of

any transaction with people on both sides of the transaction

serving almost, in effect, as market makers. You have a

more liquid and deeper market.

Price reporting may be a part of that as well,

but I think that the liquid market will help further the

price reporting policy.

In terms of where we stand today, I think we have

seen liquidity did die off in 2002, perhaps, early 2003.

Since that point, I think, you can look at it from several

points, but from the NYMEx perspective, liquidity is what I

would describe as reasonably good in the prompt month and

probably the yearly stripe. As you go out beyond that time,

from a trading perspective, it becomes much more difficult

to get anything done. There are fewer participants, fewer

people willing to take position out there.

I think the same can be said true for the fixed

price market. It may vary from point to point, but for a

goodly number of the trading points that are reported within

the various price reporting agencies you will see a

reasonable degree of liquidity. There are some other points

that rate as a two or three within their scheme and they are

much less liquid. When I look over the information from

Platts, for example, on their website, I think we\'re in the

neighborhood of 30 to 36 points that are now at Tier 1,

which indicate good liquidity, I would suggest.

I would suggest that, in terms of the questions

that you have put out, a good trading hub is one that is

there a good liquid market with a good number of buyers and

sellers and, at those points where you have good liquidity,

you\'re seeing good price reporting, seeing good prices and

price indications.

Effectively, what is needed to enhance liquidity

at some of the other points and overall is additional

participants to step in, perhaps, people to step up and

become market makers, willingness to a position on either

side of the market to recognize that when parties do that,

they\'re doing that, simply taking a short‑term position,

expecting to get out of it in short order, may, in fact,

even be expecting to get out of it within the same day.

Those are kind of my overviews and thoughts from

the PB perspective on the liquidity situation. I\'d be more

than happy to answer any questions you have after everybody

else goes. Thank you.

COMMISSIONER HARVEY: Thank you, Mr. Martz.

Mr. Edmonds?

MR. EDMONDS: Good afternoon. My name is Chris

Edmonds and I\'m president of the Energy Brokers Association.

I welcome this opportunity to share our perspective. The

Energy Brokers Association represents not only over‑the‑

counter brokers, but also organizations such as NYMEX as

well as Intercontinental Exchange and, collectively, I would

say that we represent a substantial or super majority of all

of the transactions that are not just direct, bilateral

transactions between companies that happened in North

American Natural Gas and Electricity.

That, on behalf of the EBA, I appreciate this

opportunity to offer our view in what we believe the current

levels of liquidity are available within the energy trading

sector. As intermediaries, we\'re always concerned about the

level of trading activity in the current trading

environment. Is it going to go up? Is it going to go down?

That\'s how we\'re compensated, so it\'s very near and dear to

us as you might imagine.

The EBA and its members are committed to

supporting ongoing efforts to improve the index volumes,

their creations, such as in the case of electricity and

credibility for both the sector and the pricing mechanisms

employed by the industry. The Commission and Commission

staff have commented on four potential opportunities,

courses of action going forward. Like a number of people

who have spoke today, we think that Option 2 of continuing

to monitor the market activity around data collection in

those participating is the right choice, at least, at this

time based on the information we have available.

It is possible that members of the EBA could

support an independent data hub, but only if an independent

data hub was put forth in a very concise manner in a

business plan that is detailed enough for us to understand

what it implications it would have for our business. To

date, we have not seen a proposal that we would find

acceptable.

Members of the EBA believes the market is headed

in the right direction by mandates or concerns therefore,

future mandates. The industry realizes it must provide

reliable, accurate and transparent information if it is to

grow. New market entrants will not participate if this is

not the case. New market entrants or participants are

developing almost on a weekly basis. I think if you would

survey our membership would find that at least one of us

sees a new customer, a new trading entity in some form or

fashion. It\'s not a UBP. It\'s not a new marketing company,

but it someone who has the ability to take a position and

enter the market, whether it\'s futures related, OTC related,

what have you and we feel that\'s a positive indication and

we feel this positive indication is that market concerns are

much less today than they were 12 months ago because we

weren\'t seeing that 12 months ago. Twelve months ago, I

might have had to say the inverse to you.

The questions the staff put forth to this panel

there are a couple of things and I\'ll just make a brief

comment on one. You asked about liquidity. I would say how

do you define adequate liquidity? Certainly, Martin gave an

adequate definition of what liquidity is, but does that mean

it\'s adequate everywhere? That\'s a risk decision that our

customers make each and every day.

I would offer up that our customers look at the

certainty of the markets. Will it still be there? Can they

get in? Can they get out of certain positions? It\'s that

certainty that they\'re trying to understand and make risk‑

based decisions on that. I would say the last thing is we

think there are five value drivers that run liquidity within

a market. One is credit quality and I don\'t think you can

underestimate the amount of important that has. Just as

different cities, if you want to think about a municipality

has different pockets of credit quality within a

geographical area, so does our industry in some respects

and, if you see a large concentration of lower credit

counterparties in one location, you may see more activity.

You can\'t discount what that means to the people who want to

enter in that market space.

Obviously, the price of the commodity is

something that we have to focus on. Volatility, you know,

moderate volatility is something that the market for a very

liquid hub would accept. Extreme volatility, everybody just

gets out of the way. It becomes way to expensive and you

can\'t predict where it\'s going. Obviously, you have to have

the players that Martin talked to about and I\'ll come back

to this word \"certainty\" again. All of these things are

going to continue to be there.

With that being said, I\'d welcome any questions

that you all may have for us. We again thank you for the

opportunity to share our perspective and be here today and

look forward to participating in the solution going forward.

COMMISSIONER HARVEY: I\'m going to digress for

just a second. I grew up in Atlanta, Georgia and moved to

Houston, Texas. It took about a year and a half to realize

that when people said \"UT\" they didn\'t mean University of

Tennessee.

(Laughter.)

COMMISSIONER HARVEY: In this building, whenever

we schedule meetings with the Energy Brokers Associations it

creates much confusions because the EBA means something

different in this building than Energy Brokers Association,

but it\'s fun to see the confusion as it happens.

Mr. Sahay?

MR. SAHAY: Good afternoon. I\'m Pankaj Sahay

from Price‑Waterhouse‑Coopers. Before I begin, I wanted to

make a couple of points.

First, the topic that I will address talking

about the role of the independent audit and reviews was more

suited to Panel 2, but, I guess, because of the popularity

of the morning session and afternoon flights, they managed

only to put me on a later panel. Thank you for that.

The second is the usual disclaimer that the views

expressed are mine and not that of Price‑Waterhouse‑Coopers.

PWC is a firm that provides both assurance and advisory

services. In the advisory service in the area of the risk

management, reliability audits, transaction services,

regulatory support, among others. But today I wanted to

focus on the role of independent reviews in the price

reporting process.

While the work in the finance auditing world is

well‑known, less known is our work in doing the audits of

market operators as Mike would know, since he worked at

PJMISO. We worked on numerous occasions to assist clients

and markets on reviewing the operational processes,

evaluating the risks and controls and providing assessments

related to both the process and technology improvements.

Speakers before me have eloquently spoken about

the importance of price liquidity and described the process

from transaction initiation to price publishing, so I\'ll not

go into that. It is sufficient to say that it\'s a very

critical process and there are a number of risks related to

both people, process and technology that could occur

throughout the cycle. There is a framework that has evolved

and, for those who have the presentation, it\'s on slide 6.

And this framework is widely used. It was created by the

Committee of Sponsoring Organization of Treadway Commission

and it\'s commonly known as a Corso framework.

What this does is, for any process, be it price

reporting or more commonly right now the focus is on

financial reporting, you can classify the process in a

maturity cycle, which is very very well defined and it

ranges from the process being unreliable all the way to

being fully optimized. And price recording is one process.

Right now, if you ask different participants, they\'ll

provide different ways in which they\'re doing it and this

framework does provide a comprehensive framework in which

you can classify where they are.

The unreliable stage is described in

unpredictable environment at the initial stage at the

maturity cycle where control activities are not designed or

in place. And most unreliable processes co‑exist in

environments with little or no automation and enabling

technologies.

The second stage is the informal stage where

control activities are designed and in place, but are not

properly documented. Process with informal control

activities result in an environment where the processes are

ad hoc in nature and have heavy reliance on manual

activities. Progressing to the next stage for a business

process is a standardized stage where control activities are

designed and in place and are adequately documented.

Processes with standardized control exhibit mature

deployment of supporting technology and integrated systems.

Moving to the more mature levels of being

monitored stage, there we have standardized control with

periodic testing for effective design and operation with

reporting to management. Technologies that allow the

process to become standardized make it easy to test the

controls and, hence, monitor it periodically.

Finally, in the maturity cycle is when the

process is optimized and, at that stage, integrated controls

with real‑time monitoring by management and continuous

improvement takes place. And, with real‑time monitoring,

typically, is founded on integration of the disparate

systems and the ability to control the result of the data

and communicate it in an efficient manner and technologies,

such as XML and XPRL and data transportation standards, such

as web services are used to enable the final stage.

In summary, independent reviews does provide

objectivity and transparency. It leads to formalization of

procedures that are typically required for auditing. It

provides an efficient means to mitigate the risks and it

provides an incentive for documentation and standardization.

And, depending upon the nature of the distribution, as one

of the panelist before talked about, agreed upon procedure,

there are different ways in which you can distribute the

findings, agreed upon procedures being one, slide 17, and

reporting under the consulting standards. Thank you.

COMMISSIONER HARVEY: Thank you.

Mr. Jepperson?

MR. JEPPERSON: Good afternoon. My name is Tom

Jepperson. I\'m Division Counsel for Questar Market

Resources. I want to thank the Commission for this

opportunity to share comments on this important conference.

Questar is an integrated gas company with an LDC

interstate pipeline company and an unregulated provision for

its producer‑gathering marketing business with operations

primarily in the Rockies and the mid‑continent regions.

I\'m here today representing Questar\'s upstream

and midstream units, including its trading company. My

comments will not be directed to Questar\'s regulated

businesses or to pipeline tariffs use of index prices.

Rather, my views will reflect those of a producer.

Reports by the Market Price Reporting Action

Committee and the index developers are encouraging that

eventually most market participants will voluntarily

participate in fairly and accurately reporting their cash

market fixed price transactions to the index developers.

Without question, there has been substantial

increase in market participants\'s confidence in the process

of price discovery and index development, which, heretofore,

was relatively absurd, except to the index developers.

While staff\'s report of May 5, 2004 confirms that

substantial and meaningful progress has been made in the

transparency of price indices as well as in the number of

parties reporting and the number of transactions reported,

there is still room for improvement.

Questar agrees, and therefore supports, Position

2, that the Commission should continue to monitor and

encourage industry to adopt the Commission\'s policy

statement and to commit to full and fair reporting of its

cash market fixed price transactions that form the basis of

the price indices. However, if continued improvement is not

made, then Questar would support Position 3 for some type of

mandatory reporting. And, noting there that comments

earlier were that, perhaps, there might be some exemption

for small entities. That the cost would be burdensome.

While evidence of renewed confidence may exist

among market participants, there is still a great deal of

work to be done to restore confidence of the public and

other stakeholders of energy transactions. For example, the

Minerals Management Service came out on May 5th of this year

with its final rule pertaining to oil royalty evaluation.

It adopted a NYMEX price instead of spot market prices. It

stated \"use of the NYMEX price is the basis for royalty

value has several advantages, not the least of which is that

the volume of transactions and the number participants are

so large that, at least, theoretically, no one entity could

manipulate the result in price.\" This is an issue partly

because of the recent publicity and questions about the

information provide to spot price reporting services and the

effects such potentially inaccurate information has on spot

prices in general.

The MMS has indicated that it will shortly

published proposed rules for gas royalty evaluation.

Hopefully, the MMS will continue to use spot price indices

as one of its benchmarks for valuing gas, but a lot hinges

on the outcome of these proceedings. In the past several

years, the gas‑producing industry has been plagued with

royalty valuations claims in the private arena, challenging

the use and reliability of index prices, among other things.

Even though many of the claims are frivolous, they are

incredibly expensive to defend. Without question, we need

to do whatever it takes to have price indices stand up in

court, even if it means mandatory reporting.

We do not only need solid price indices, but we

need as many market points of liquidity as can be reasonably

developed. For instance, a couple of years ago, the

Colorado Supreme Court adopted a highly criticized rule of

law that the point of royalty valuation for gas produced in

Colorado would be at the viable commercial marketplace where

there are sufficient buyers and sellers even if that means

for the producer to bare alone the cost of long distance

transportation. Thus, Colorado producers need to prove up

the commercial marketplace, wherever it may be, in order to

establish a point of royalty valuation.

In other states which value gas at the well,

there still remains the critical need to establish market

value or market price under typical oil and gas leases at

locations near the production points rather than NYMEX and

Henry Hub. With the continued and steady guidance of the

Commission, hopefully, all or nearly all market participants

will report their transaction and cooperate with ensuring

that the spot price indexes are reliable for their useful

purposes and defensible against anyone who cares to second

guess their integrity.

On the points of liquidity, our marketing shop

notes that liquidity has increased substantially over the

past year and that, generally speaking, we find liquidity in

our market in our production areas. Our marketing shop is

primarily involved with marketing equity production and we

do find substantial liquidity in those areas. Occasionally,

we find soft liquidity. So, in that regard, we see

substantial improvement.

The other point I wanted to touch on was the hub

concept. We all note that the significant hubs, like Henry

Hub, of course, have tremendous take‑away, great

transparency, a lot of services, et cetera. At another

different level, one could look at possible hub

opportunities and the increase of liquidity at the

convergence of unregulated assets and regulated assets.

Occasionally, you\'ll have a gathering system that

interconnects to multiple points with interstate pipelines.

Typically, a gathering company will stand aside

and say I won\'t touch any gas that\'s on the interstate line

because I don\'t want to be regulated. Perhaps, the

Commission could look at further development of light‑handed

regulation to encourage that type of hub activity. Also, we

find that on storage‑type projects that if there were

market‑based rates allowed, generally, that storage projects

might be more forthcoming and a consequence of that might be

more hub activity and liquidity. Thank you very much.

COMMISSIONER HARVEY: Thank you.

Mr. Kaminski?

MR. KAMINSKI: Yes. Thanks. My name is Vince

Kaminski. I am the managing director at Sempra Energy

Trading, an energy trading marketing company located in

Stanford, Connecticut.

Let me start with the usual disclaimer that the

views expressed in this presentation represents the opinions

of the speaker and not necessarily those of Sempra Energy

Trading and that I would like to join most speakers who

participated in this technical conference and say that over

the last year we have seen a very substantial improvement in

the quality and the volume of price data available across

practically every energy market in the United States. And,

to a large extent, it is improvement that is due to the

police measures implemented by the FERC and the CFTC. And I

would like to join other commentors in extending recognition

to both institutions for efforts to improve price discovery

and price transparency in the U.S. energy markets.

We were asked to comment on liquidity and price

discovery in the context of trading hubs. And this is a

really unique trading arrangement typical of the energy

markets and a trading hub is really a combination of

physical and institutional assets that are critical of the

functioning of the energy industry in the United States.

When we are talking about the physical assets, we

are typically talking about intersection of transportation

and transmission lines, gathering systems, storage

facilities, switch yards for the electric lines and the

communications infrastructure. When we are talking about

the institutional assets behind the trading hubs, we are

talking about the institutional infrastructures supporting

both financial and physical transactions and for

facilitating handling of the physical commodity flows. We

are talking about trading corporations, the operations that

specialize in landing and parking energy commodities. We

are talking about the institutions helping ‑‑ transfer and

so on.

We are talking also about some other

institutional assets, which are critical to the operations

of the market. Specifically, we are talking about

conventions that underlies the standardized product

definitions, the ways prices are quoted, the way people

communicate in those markets and all those institutional

assets, all those conventions they help to reduce search and

transaction costs and improve market efficiencies.

So one of the questions we were asked is, in what

way FERC can help to improve efficiency of the existing

trading hubs and the obvious way, and this was referred to

by other speakers, is that the FERC can help in two

different ways. And one way is to help in development of

the necessary physical infrastructure that supports trading

hubs and, especially, storage and communication facilities.

And, also, FERC can help in a different way,

which is really critical to the energy market at this point

and this is primarily in the development of standardized

products, of standardized transactions which would help to

reduce transaction costs and it would also help to address

the credit issues. I\'ll be talking about it in a moment.

I am involved, particularly, every day in

validation of prices that are used by the trading

corporation for market‑to‑market all the positions that we

have in portfolio and, as of today, I don\'t have to worry

any longer about the monthly and daily price indices. I

think that the quality has improved greatly and I haven\'t

heard any complaints or any surprises about the levels of

daily and monthly indices.

What remains to be addressed is probably the

price discovery and the quality of data for the forward

market, especially, for longer ‑‑ and for certain locations

for which it is very difficult to get forward price

information for longer ‑‑ extending beyond the next season

or beyond the next year or two. Right now, the information

about forward prices comes in the form of assessments from

certain publishers and also in the form of bid offer spread

prices coming from the brokers. This information, sometimes

it\'s limited for certain locations, for certain physical

commodities and for longer ‑‑. I think the next critical

step for the energy industry is improving the quality of

information in the forward market.

And the final critical issues for market

liquidity is, of course, credit. And we know that credit is

a critical constraint in the energy markets in the United

States. And, to a large extent, this is due to the fact

that the industry is currently relying on very antiquated,

inefficient and expensive system defined around bilateral

credit arrangements, which require an efficient use of

working capital and risk capital.

And, of course, this can be addressed in the long

run by moving to the system of credit risk management based

on multilateral clearing and netting. This is, of course,

the best solution. But I have been for the last few years

that the industry can quickly move and embrace this solution

and this will help for a number of reasons.

First of all, we\'re operating in the industry

where physically delivery is critical. And, in many cases,

both counterparties want to rely on long‑established

relationships and want to count that the counterparty has an

access to the critical, physical infrastructure to make

delivery. And many exchange‑based effectively are in

equivalent of a blind date. You know, we find out with whom

we are transacting and who is making the delivery when it\'s

practically impossible to make the change.

Another problem is that many energy transactions

are understandardized and I have mentioned this before. But

it creates a huge problem when it comes to clearing and

netting. We can effectively clear only what we can value

without ambiguity and the problem is that many energy

transactions are not standardized and the industry has no

recognized agreed method of valuation for those transactions

and this means that in many cases we have a vicious circle.

We cannot clear transactions that we cannot value,

therefore, we have a low volume. We have high cost of

managing credit risks, therefore, we have low liquidity.

Low liquidity translates into limited price discovery.

Limited price discovery limits our ability to value the

transactions in an unambiguous way. And, of course, FERC

would help by pushing forward a number of standardized

descriptions in different physical markets.

And, finally, in many cases, switching to

multilateral clearing and netting will result in increased

credit cost for the following reasons. Right now, many

companies are managing credit risks by establishing credit

thresholds below which the margin ‑‑ doesn\'t apply. And, of

course, it\'s energy companies that use high thresholds of

exposure to determine the level at which margining begins

are trading immediate cash expense for a different type of

an expense related to the warehousing of credit risk.

And, of course, warehousing of a credit risk is

another cost. This cost doesn\'t have immediate cash

consequences, but it\'s still a cost. If there is a move to

margin ‑‑ based on multilateral netting and clearing, it\'s

like margin requirements would kick in at point zero and

many companies would lose the advantages of thresholds they

are currently using in credit risk management.

So these are my initial comments that I will be

very glad to elaborate on those points during this panel

session.

COMMISSIONER HARVEY: I\'d like to start with a

question following up about credit.

For a very long period of time, credit didn\'t

appear to be sort of a major central issue. There was the

occasional bankruptcy and that would have ripples that we

kind of run through, but didn\'t seem to be as forefront as

it\'s become in the last couple of years with the failure of

companies with the credit downgrades.

Some of the more innovative ideas about

multilateral netting and some of the other purchases seem to

be slow in taking off right now. I guess I would sort of a

question for an assessment and I would like to get all of

your views on this. Are we sort of at a point where credit

has loomed large because of the financial condition, the

sort of localized condition. Are we at a point where the

cost of credit are being more appropriately recognized now

and beginning to work towards that? Were they always

appropriately recognized again and the downgrades kicked in?

I mean, where are we in the cycle of where credit affects

things. It occurs to me that the credit costs of these

transactions would have to be relatively significant and it

would be important that they be reflected some how in the

levels of liquidity and the interactions that are going on

out there. On the other hand, are we, again, at a sort of

local set of situations that its effect on liquidity or is

it really being recognized and are these things that are

finally being struggled with?

MR. MARTZ: I guess I would suggest that there

have been a couple of factors that impact upon credit.

One, I would suggest that parties are probably

taking a closer look at the counterparty\'s ability to pay.

Secondly, I would note that, if you\'ve seen a run up in the

price over the last several years from the level of \$2 maybe

two, three years ago, that also has a substantial impact on

the ability of the various parties out there to carry credit

and it even effects their ability to engage in transactions,

in part, for example, in the BP organization, you have what

they call \"value at risk\" and the higher the price the

smaller positions you can put on without running into your

bar limits. So it has several different effects in terms of

the price component and volatility, also, will effect the

ability of an entity\'s credit view of the other party. The

more volatile the market is the greater you\'re going to look

at that credit because you expect more movements in price,

which, in turn, affects the level of potential damages from

that counterparty.

COMMISSIONER HARVEY: But, I mean, is your sense

to maybe clarify my question, is your sense that people are

now in better command of those issues? That they simply

have to approach them differently than they used to because

of these changes in the marketplace? We here, antidotally,

things like I can\'t deal with the first five people that I

talk to because I don\'t have credit with them and, as it

turns out, on the one hand I could be concerned about that

because that means we might not be getting pricing that\'s

particularly efficient if there\'s big transaction costs that

are being thrown into the system.

On the other hand, if there are real transaction

costs in the system associated with credit, I want that

reflected in the price by the time it comes out.

MR. MARTZ: I think parties are looking more

carefully at the counterparties\'s ability to make payment

and cover their credit obligations.

COMMISSIONER HARVEY: Okay.

MR. EDMONDS: I would offer along those same

lines that some of the adoption by the industry of third

party clearing mitigation services, such as offered by two

of our members, one NYMEX and the other at Intercontinental

Exchange. The adoption of those products, what that meant

to free up or to better utilize the risk dollars a company

was willing to put at stake has been a very positive step

for the industry. I think that still is being refined on a

daily basis, but I would offer that any encouragement on

increasing the product set and I think it\'ll go back to some

things that Vince said about the standardization and the

products. Going back to something I said a little bit

earlier about the certainty of that standardization of

products would allow people to develop additional credit

mitigation services to those that already exist, allowing

more people to have access to the market.

In my earlier comments, I made the statement that

we\'re seeing the development of new players. Most of the

development of those new players are coming in because

they\'re trying to implement their strategy and trade ideas

around things that credit is no longer an really an issue

for them because they know exactly what credit is going to

cost them. They clear NYMEX. They clear Intercontinental

Exchange. It\'s a number. They understand how to calculate

that number and they price that into their equation. Is it

always reflective in the price, no. Certainly not, I don\'t

think, when you come to the physical‑based transactions,

maybe more so in power than what you see in natural gas

because those are some of the products that may need a

little bit more refinement before they\'re then listed. But,

certainly, things like bases swaps and products of that

nature have been incredibly uptakes and that\'s when we\'ve

seen the increase in volume in the marketplace and the

increase in the number of participants willing to step in

and add liquidity to the marketplace, even if some of them

were less liquid hubs.

MR. SAHAY: I guess credit has, particularly, for

the unregulated sector, changed the business model. So it\'s

been more a binary decision and it\'s far from the fact right

now that people are pricing credit in an efficient way. And

longer standardization will evolve and as Vince was talking

about, multilateral more efficient netting procedures will

evolve, but, by and large, I would say, as you said,

antidotally, that you just look at the good credit rating

and trade with them or not.

MR. JEPPERSON: After the sort of merchant

meltdown, credit was a huge issue for us. I mean, it was a

daily meeting talking about who can we sell gas to, you

know, and it was big deal, not so much now.

My perception is, is that it\'s not standardized.

It\'s getting there, but it\'s not very standardized at all

and we have to provide margin call in crediting, et cetera,

back and forth with each counterparty and negotiate that

individually, et cetera. It would be nice to get a

standardized methodology and, also, some kind of bilateral

netting that would be standard across the industry.

I\'ll add one other comment and that is, for

smaller companies, they have their credit revolvers under

which they might supply the capital for all that they do and

those bank transactions have covenants in there about how

much credit you can extend and what you can do and those are

also limits to what companies in this business can do.

MR. KAMINSKI: Well, credit is probably the

biggest challenge for the energy industry right now that

cuts across all the markets and then there are several

different issues. I can only signal because it would take

another technical conference like this one to talk

exclusively about the issue of credit.

You know, first of all, we in the energy industry

we don\'t have an efficient infrastructure for managing

energy risks in two ways. And the first problem is that we

have many different agreements that cover selectively

different markets and, in many cases, they overlap. In many

cases, they may be contradictory. And this is a condition

in which I call MAD. It\'s a multiple agreement disorder

which increases greatly the cost of managing credit risks.

Another problem is that, unlike in the financial

industry, in the energy industry, we don\'t have good ways to

price the credit risk. Practically, no company prices the

credit risk directly into the price of the financial and

physical transactions. In some cases, a company will take a

credit reserve, which will correspond to the estimated cost

of potential credit exposure. The critical problem with

credit right now is that the industry doesn\'t have good ways

to measure it, but everybody agrees that this is a major

problem and it affects the way we are doing business.

Whenever we contemplate entering into a long‑term

transaction, we have always to think about the potential

liquidity drain related to the big move in the market

prices. And, given the high volatility of prices, and also,

given the secular shifts that may happen from time to time

in the energy markets, related to the supply shocks or

political shocks, the potential credit drain or working

capital drain related to any transaction may be very, very

big.

The one immediate consequence of this situation

is that in many cases the transactions are mush shorter than

they would otherwise be. In many cases, instead of looking

at five‑year transaction after thinking about the potential

liquidity drain, the potential credit costs, we zero in on a

much shorter transaction. Let\'s say a transaction extending

18 months to two years. And, of course, this has

consequences towards risk management that is available to

different players in this business. It has consequences for

the ability to manage risk. It reduce the overall economy

efficiency of the United States economy and, given the

importance of the energy inputs to the industrial processes

and, also, the importance of energy as a consumption good,

you know, it has very, very big impact on the overall U.S.

economy. So the consequences are bigger than one might

think in the beginning.

MR. PERLMAN: Can I ask a couple of questions on

what all of you touched on, but, also, what Mr. Kaminski

just said? On this multiple agreement disorder, it\'s my

understanding that ISDA has created something quite a while

ago called an \"energy bridge\" and recently has put in a

power index, which effectively has everything under one

agreement. And then, there\'s also various master netting

agreements, such as the EI Master Netting Agreement, which

allows, for credit purposes, all physicals, gas and

electric, as well as derivatives to be netted together for

credit purposes and liquidation and closeouts.

So, I guess, one question I have is, do you guys

take issue with the efficacy of those documents and do you

not use them or is there some problem there? But, more

importantly, with respect to the standardization of

products, I guess I\'m a little confused because I know that

ISDA has adopted the EEI electric product definitions for

its power NX and they seem to capture, at least from what I

can tell, the vast majority, if not sort of the totality, of

everything that can be standardized today.

So is there a need ‑‑ you\'ve talked about a need

to standardize electricity and I guess gas products and the

gas products seem to have historically have been effectively

standardized for things that can be effectively traded as a

standard product. Is there some need to further

standardize, to identify products that the Commission should

some how get involved into to help the industry better

standardize its product definitions beyond what it\'s done

today and beyond what\'s been adopted by ISDA and the

electricity sector at least?

MR. EDMONDS: I\'ll offer this out. If you look

to trading activity for electricity in PJM or the New York

ISO, there\'s a considerable amount of certainty around the

standardization of what you\'re buying and selling. I can\'t

really say that that\'s the case when you talk about synergy,

for example, even though synergy is an extremely active hub.

But the tenure of the trades in synergy on an active basis

versus the tenure of the trades in PJM is short.

MR. PERLMAN: Is that because of regulatory risk

of the Commission and regulatory change into the market

structure as oppose to product definition?

MR. EDMONDS: My opinion would be that a possible

regulatory component that ‑‑ now that regulatory component,

if I look at PJM and what I\'m buying and selling in PJM and

what I\'m going to call an organized market versus synergy

and what we\'ll call an unorganized market, I may put myself

in a position where I don\'t ‑‑ it\'s a best effort or best

guess in synergy where it\'s probably more of a sight

available in the PJM and in the ISO market.

Obviously, the standard market design that people

have talked about, and I\'ve sat through technical conference

here before in the past to think would have been a move in

the direction that people would have overcome that using

some of the components of that proposed effort. But we\'re

not there and everyone knows that story much better than I

do probably.

MR. PERLMAN: I\'m going to try one more time. I

mean, it sounds like what you\'re talking about, I would be

interested in everybody\'s reaction to this, is that there\'s

better transparency and more structure in those markets that

allow, I think, probably for more effective and efficient

trading because the information is more available and the

administration by the independent system operators allows a

lot of data to come out. I don\'t know whether there\'s a

lot. There\'s an efficient trading hub and that sort of

thing.

In my mind, I see that different that an

standardized product and, if there something that needs to

be done with respect to the standardized products for either

type of market, because we\'re going to be living with both

that the Commission can help with, please tell us that there

is and tell us how we can go about helping to identify that

and work forward.

MR. EDMONDS: I don\'t know that I have the answer

to that one today. Anyone?

MR. KAMINSKI: One comment about the different

credit agreements. First of all, my experience is that

negotiating a credit agreement is typically a very long

process and requires going through a long process of

negotiations and the second problem is that my understanding

is that right now we cannot net across physical and

financial transactions and this a major limitation of the

existing netting agreement. This is my understanding and I

haven\'t heard anything to the contrary.

Now the problem of standardization comes up in

longer energy transactions, which typically have a lot of

embedded optionality and many different clauses that ‑‑ the

contract, depending on the market conditions. So, as a

result, we have typical energy contract, longer term energy

contract is a preferred over a very complicated interacting,

interrelated options and this is why negotiating a contract

and valuing a contract is a very challenging task. It would

help to develop a standard of longer term transactions that

could be used by the industry\'s leggo blocks, highly

standardized but which allows you to construct practically

any structure you want, a structure that can be easily

decomposed and taken apart. Piece could be transferred to

different counterparties. This would be extremely helpful.

I would make a comparison that the current

process of structuring a longer term energy transaction

reminds me of being an artist in the Middle Ages before the

arrival of the Industrial Age where everything is handmade,

everything is customized, every transaction is a snowflake.

It would help to have more standardized basic building

blocks of longer term transactions. It would allow to

accelerate and improve the process of developing longer term

transactions. And we have seen the same process, more or

less, in the financial markets. The financial markets have

come a long way towards standardization of most contracts.

MR. PERLMAN: Don\'t those building blocks exist

in, let\'s say, the organized markets as was mentioned where

you can have capacity, ancillary services, energy, operating

reserves, forward reserve markets, things like that. Is

that the type of thing that you\'re hoping the Commission

will attempt to put in place so that you can them and

approximate your structured transaction and then you think

that would help with the liquidity?

MR. KAMINSKI: Oh, absolutely. Exactly.

MR. PERLMAN: And that\'s because you could value

the transaction better?

MR. KAMINSKI: And we have also more price

discovery, longer term markets, longer ‑‑

MR. PERLMAN: So this would make it much easier?

MR. KAMINSKI: I was going to say you\'re also

looking for longer ‑‑ for those kinds of things. The

biggest challenge is that sometimes we have to risk manage

or value the assets with very long life and, if we have the

financial markets, the financial instruments with much

shorter life, it creates a serious challenges when it comes

to valuation and risk management.

MR. MARTZ: In terms of those EEI credit and

master netting agreements, et al., I think one of the other

things is it takes a substantial amount of time to get any

of those in place because neither party is willing to start

and just accept the basic EEI Master Netting Agreement. We

all have numerous changes we make to them and it is an

extensive process.

The other thing to think about is, in the case of

some companies, PB being one of them, you\'re looking at

putting a master netting agreement in across several

companies. By way of example, we do our financial trading

in the publicly rated company. Certainly the physical

trading is done in other entities. That adds to complexity

in terms of getting those types of agreements in place.

MR. PERLMAN: Does that structure create problems

in getting the benefits of netting? Because, I think, as he

said before, it\'s difficult to net physicals against

derivatives under the bankruptcy law, but I think it\'s

probably ‑‑ and there\'s some ambiguity there, but I think it

very difficult to net in bankruptcy across entities. If you

have a single maybe. So your structure may cause some

issues there.

MR. MARTZ: We\'ve been able to work and put in

place master netting agreements across the entities. It\'s

just a more timeconsuming process, so it takes longer for

you to get to that point and sometimes the other half of it

is the other party that you\'re trying to reach that

agreement with has to be interested in achieving the same

result.

MR. JEPPERSON: Our experience is the same. That

the credit annexed to the ‑‑ agreement usually comes with

customized provisions and about a page of them and then,

likewise, on master netting agreements and then you\'ve got

the complication of affiliates who are transacting with that

same counterparty and you do try to do triangular netting

and different things and you get objections and it\'s a mess.

MR. EDMONDS: I would just add I was just asking

Martin to confirm my suspicion. I think one of the things

we see as an intermediary, what happens is, even if you get

one of these contracts and you get to the labor of love, I

guess it has to be in some respects, to get one done. Even

if Martin and, let\'s say, Vince at Sempra were to come to

terms on that contract and they got it all in place. ‑‑

tweaks that when they go both to do a similar transaction

with Tom\'s company, for example.

Now you have two separate standards that aren\'t

necessarily fungible with one another, even though they may

be for the same product, same term and everything else. So,

even though you think you\'re buying Rocky Basis Swaps, for

example, I\'ll just use this as a very simple example, when

it times to these guys on the backside of the house to get

that done, the small tweaks in that may not allow them to

actually transfer those positions. So that would be an

additional constraint you\'d have to come over until everyone

got on the same page in that effort.

MR. CHOO: So are you saying then, potentially,

there may be a role for FERC to help standardize across

these contracts?

MR. JEPPERSON: I don\'t think so.

(Laughter.)

MR. MARTZ: Do you really think you\'re up for

that one?

(Laughter.)

MR. CHOO: Just asking now. The lawyers can work

on that.

MR. PERLMAN: Frankly, that\'s why I asked because

it seems to me that these things are best done by the people

who have to with these transactions, live with one another,

ultimately, litigate it if there\'s a problem somewhere else

and we provide the basic platform and structure and

marketplace for you to do your transactions in. So, getting

back to the question of trading hubs, is there something

that we could do to better provide a structural platform to

put in place trading hubs that would allow you to reach

standardization, get more liquidity, focus on a location?

I know in the organized markets, the PJM West

example and the other types of trading hubs like that seem

to be good. But is there a need for more trading hubs in

the gas market, for example, in the Pacific Northwest or the

Rocky Mountains or the West, that somehow the FERC could

provide some benefit to, to provide a focus for a particular

location or some element to try and get that liquidity going

in an area maybe doesn\'t have a viable standardized basis

with Henry Hub?

MR. MARTZ: From a gas perspective, I think, and

from PB\'s perspective, the West has been one of the fairly

liquid areas. There is, in terms of the NYMEX cleared

market for basis swaps, there is a good market. Albeit, it

is not necessarily very liquid when you go out long periods

of time like the NYMEX futures market. Can you go to \'06,

\'07, 08? It\'s much more difficult to get things done as

opposed to the early months around the prompt month.

In terms of liquidity at some of the points for

physical gas in the West, our view is that it has been good

there. There is a good base for trading in some of those

points. We\'ve experience less of a concern on the West

overall. In terms of the physical trading, we\'ve seen

liquidity come back and it\'s actually been improving,

albeit, not at every one of the 70 points that the Platts

reports and the number that NGI reports. But, for the

majority of the points, I think it is good right now.

MR. EDMONDS: I would just offer of ‑‑ I mean,

the first question you all posed to this panel was define

adequate trading activity and I think what Martin\'s saying

is, on the short end of the curve, especially, out West,

even though we\'ve seen a significant increase in the amount

of volume that trades out there across a number of different

products, you can\'t necessarily get that same type of

consistency further out on the curve. So do we have

adequate liquidity? Well, yeah, we do.

Do we have adequate liquidity on a ten‑year

strip? Probably not what most people would call adequate.

So it comes a little bit more subjective on how you price

and value that particular transaction.

MR. MARTINEZ: I would like to ask a question.

On that first question, most of the data that we\'re talking

about one particular institutionalize asset, the one of

price reporting, transparency, mostly next day and bid‑week

or next month.

Imagine for a moment that there were a lot more

transactions in those markets, the support market, and that

there were perfectly recorded and published and it were

clear. I\'m asking about your intuition and your opinion.

How would that affect ‑‑ would that cascade in some way into

greater liquidity in longer term markets? How does these

contracts, all these different systems of contracts connect

so that maybe improving transparency in one of them in the

short term affect the longer term?

And, also, one concern we\'ve had is about the

different levels of market activity in different parts of

the country. And, in the topic of hubs, do hubs compete

with each other or do they help develop? Is it like having

the hub reduces other locations to have very little activity

or do they actually promote it? Like, imagine that we were

just successful in what we were trying to do this morning,

what would you expect to see going forward, happening from

there in terms of populating other markets?

MR. MARTZ: I think one of the issues, and Vince

has hit on it in terms of developing the points further out

on the curve, comes back to credit‑related issues, comes

back to people being willing to engage in transactions that

go out one or two or three years. Part of it is credit.

The other part of it may very well be volatility as well.

People may be less willing to take the risk that price is

going to move a lot farther out on the curve. You don\'t

have good indications of where the price may end up, so it

makes it much more difficult and you don\'t have any many

parties willing to transact out there.

MR. EDMONDS: If you look at the gas market, for

example, and you look at what\'s generally considered to be

the Gulf Coast region, pretty low volatility, historically.

Things sit out there, whether it\'s one year, two years,

three years, whatever. Going out, you pretty much know

where the market can be and it\'s going to be within a finite

range. So is there a lot of activity there? That\'s rubber

meet the road. People get that business done and then you

look at the development of the activity around Houston ship

channel, for example, and I would argue that over the last

three to five years you\'ve seen a tremendous increase in the

value that that brings.

It has a much different volatility curve than,

let\'s say, Henry Hub. And, if you talk about the basis swap

markets and things of that nature and you see that

volatility extend out through the spread relationships to go

further out west and the ship channel versus the ‑‑ or ship

channel versus Panhandle, things like that. So, absolutely,

to answer one part of your question, Rafael, you absolutely

see one hub help build the other one. San Juan versus The

Rockies and things of that nature. You start to see these

spread relationships where people may not be as comfortable

with one versus one hub or the other independently, but when

the correlation ‑‑ with those two together, they\'re very

happy with and willing to engage in those transactions,

provided that they have the credit facility, as Martin said,

to do something that far out.

MR. KAMINSKI: Well, to answer your specific

question about the competition between different hubs, my

view is that there is a positive externality in development

of different hubs and the new hubs are not stealing business

from the existing hubs, but they improve overall efficiency

of the gas flows through the system. And they are, over the

last few years, several new hubs in the natural gas markets

have been created, given the development of the pipeline

infrastructure and the fact that new pipelines have been

created. Those pipelines intersect at certain points. Gas

has to be moved from one pipeline to another and the

existence of a hub facilities moving the gas and assist

them. So the overall system becomes more efficient. The

volume of trades increases, the volume flow is increased and

it has a positive externality for everybody.

One specific issue the industry has right now

when it comes to the long‑term price discovery with LNG,

there are two questions related to LNG. One is the overall

impact of LNG on the level of gas prices in the United

States. But, for many players, another issue is more

important. This is what happens at this specific point, at

this specific location, as LNG is injected into those

locations.

It\'s obvious that the basis for the relationships

will change and, also, it\'s obvious that the gas flows in

the pipeline systems will change. The gas will be pushed

back to certain producing locations, given the arrival of

LNG gas. In some cases, seasonal differences will drop.

But, given the current state of the market, it\'s very

difficult to come up with answers to those questions and I

think it\'s, again, an interrelated question and an

interrelated problem. We cannot have good price discovery

without liquidity and we cannot have liquidity without price

discovery. But at the end of the day, some critical

infrastructure decisions depend about predictions of prices.

This is why the issues of liquidity goes well beyond just

trading and marketing of energy commodities. This is a

question also of the development of the existing

infrastructure.

MR. JEPPERSON: Let me share this comment on the

competition between hubs and the impact one to another.

About 10 years ago, we were involved with the western market

center, which is a header that was built out in Muddy Creek

on Kearn and other pipelines in that area. At the same

time, Opal was developing just upstream and it won out and

it\'s location was superior and parties collected at that

point to trade and they didn\'t trade and the Western Market

Center went down, basically, even though, you know, it was a

noble effort made. And the gas market is pretty efficient

and parties want low cost, great service and go to the right

places.

COMMISSIONER HARVEY: Let me follow‑up. It might

have been Mr. Martz who used the term \"moderate volatility.\"

From our perspective, not your perspective as companies, but

from our public policy perspective, how would we define good

levels of volatility? Maybe not too little, not to much,

but just right. How would we think about that? Somebody

can help me think about that.

(Laughter.)

MR. KAMINSKI: It depends if you ask me this

questions 10 years ago, I would like much more volatility.

(Laughter.)

MR. KAMINSKI: Well, to a large extent, you know

volatility is not necessarily bad because volatility is just

a manifestation of the fact that information is disseminated

through the system. So the fact that we have volatility

means that the system reacts to new information. So I don\'t

complain about volatility as such. I would worry if

volatility exceeded many times the changes in the underlying

fundamentals of the physical system and if we have the

simplification level, you know, this means that we either

have cases of market manipulation or we just have an

inefficient system that overacts to sometimes benign changes

in the underlying fundamentals. Where do you draw the line?

It depends but, if I were to answer this questions, I would

compare the volatility in prices with the volatility of the

fundamentals and there is some level where the two get out

of sync to much then I would start worrying about the

underlying system.

MR. EDMONDS: I just had one additional comment

on the volatility piece is without the right amount, and I\'m

not going to offer an opinion on what the right amount would

be. It\'s going to be different. But certain amounts of

volatility bring players to marketplace and we\'re seeing

that right now. And, if that swings one way or another, you

may see exits of players and that\'s going to decrease

liquidity.

As Martin had said a little bit earlier, it also

increases your value of risk or your VAR. So it is good in

developing the market and it\'s what you want to see. It

can\'t become unpredictable volatility. I think Vince would

let me get away with that one because that is a negative

concept. But, moderate or predictable volatility with

people, going up or down, as it\'s reacting to news and

different events within the infrastructure is a positive

thing for market because it allows different opinions and

different people to participate.

MR. OVERDAHL: Let me just add a perspective from

the futures markets because this issue comes up in our

markets all the time. And the way I like to look at it is

kind of the way Vince was looking at it here. That there\'s

actually two types of volatility. There\'s a good volatility

and a bad volatility. I\'ve heard it described. It\'s like

cholesterol. But I think the good volatility is what Vince

was referring to is with ‑‑ you know, it\'s reflecting

fundamental information coming to the market. That\'s what

markets are suppose to do and they should be volatile if

that\'s what\'s going on. But what you\'re worried about in a

policy realm is anything that is maybe imposing artificial

volatility and that might include things that are caused by

government action, I guess. So that\'s one of the ways we

look at it.

CHAIRMAN WOOD: I have, I hope, a somewhat

simpler question. One responsibility we have in market

oversight is to follow development in liquidity and we look

at volumes. We look at data spreads. We look at number of

transactions. Is there anything else you\'d recommend that

we be looking at there?

MR. EDMONDS: I think you have to take into

consideration ‑‑ I know you\'re looking at prices, but the

relative impact that has on the credit profile as it affects

people\'s bar. Because if you\'re grading volume or what you

might consider to be adequate liquidity in a particular hub

based on a certain number of transactions when the price of

the commodity was \$3 and, if the price of the commodity goes

to \$6, you get exactly half the number of transactions. I

still think you still have adequate liquidity. It\'s not

going in a negative direction. It\'s just that it\'s credit

constrained at that point and so that correlation I would

encourage the Commission, from our perspective, to take

considerable look at.

CHAIRMAN WOOD: Thanks.

Any other questions? Ted?

MR.GERARDEN: I have a question for Mr. Sahay.

In the proposal that you have, you discuss document

standardization, some concepts of standardization. And,

also, one of the slides indicates a central hub for

collection and dispensing of price data. Are the

standardization concepts that you would include in here

depend on there being a central hub for collecting price

data or is there a value to standardization in an

environment that does not have central data collection?

MR. SAHAY: No. It\'s independent. So the

discussion on standardization is more along the continuum of

where the controls is in the maturity cycle and technology

or the way you\'re going to be engineering the information

deposits that\'s a separate piece. It\'s just an example of

what we did for one agency where we enabled that. Instead

of multiple reporting, it went through one central ‑‑

MR. O\'NEILL: Could I ask a question on the gas

trading ‑‑ I guess, the information we were given today, and

I\'ve seen several times, the major traders are now major

oils ‑‑ BP, Carl, Conoco, Phillips, Chevon, Exxon. That

wasn\'t true four years ago. Would you speculate on why

that\'s so today, other than the fact that some of the people

at the top have disappeared. But, I mean, is it a change in

philosophy or just the fact that the guys at the top sort of

tumbled.

MR. MARTZ: I think it\'s a combination of

factors. One, it is, in part, the fact that folks at the

top did tumble. I think another part of it has to do with

credit as well.

MR. O\'NEILL: Because you guys are ‑‑

MR. MARTZ: Double A plus in the case of BP. I\'m

not sure what Exxon or Shell or some of the other are, but

they\'re at least double A, double A plus. You have greater

capacity, greater credit capacity to engage in transactions.

MR. O\'NEILL: So is that going to stick. I mean,

I don\'t want to ask you that question, but do we see that as

the way the future is looking and it\'s just the guys that

have a lot of the credit are going to be the big traders.

MR. JEPPERSON: We found that with the meltdown

that only parties that were creditworthy were players.

Everyone was running a bit panicked because you had all of

these positions with companies that were on the verge of

bankruptcy or went into bankruptcy and so maybe as an

overreaction you just, from that forward, you\'re going to do

business with those that are substantial in credit.

MR. O\'NEILL: Vince, you\'re one of the guys in

the top five that isn\'t a major oil. Are you there because

you have good credit?

MR. KAMINSKI: Well, it\'s a combination of really

good credit and also my company was, historically, was

emphasizing physical business, a business evolving around

the fundamentals of the supply chain management. The second

reason why we have so many producers ‑‑

MR. O\'NEILL: That\'s your parent company.

MR. KAMINSKI: That\'s right. My parent company.

That\'s right. And the second reason why we have so many

producers dominating the charts, the top 20 charts, is that

it was really necessity ‑‑ a close vacuum and, in many

cases, the market ‑‑ distribution of, again, natural gas

and, to some extent, crude was very delegated to the

marketers and those marketers disappeared, like I say,

Dynergy marketing natural gas for, I guess, Chevron. When

marketers left the scene, there was no choice and the

producers had to step in and developing their own marketing

and trading corporations. And, when it extends across the

board, even some companies that were, historically,

extremely skeptical about energy trading ‑‑ energy trading

divisions now, which came as a surprise to the entire

industry.

MR. O\'NEILL: You can get labor pretty cheap in

this business today. Right?

MR. KAMINSKI: That\'s right. Also, you know,

it\'s cheaper to get energy traders by the thousand.

(Laughter.)

MR. MARTINEZ: One question. So what of this

large companies with good credit and are able to undertake

large volume of tradings, what attracts them to become

marketmakers, you know, to create ‑‑ basically, build up a

trading point? What is the attraction?

MR. EDMONDS: I would have to offer that some of

that would be customer based. I mean, if you\'ve got a

customer base that you picked up because of the decline of a

certain other service that\'s no longer available in a

particular geography and you build that up and you may not

have been a player at a particular point of delivery two

years ago, but now you\'re being forced to in order to

service the customer that is now a new customer for you.

Then, if you\'re there out of necessity in order to provide

the adequate amount of service for your customer base.

MR. MARTZ: We look at it in terms of providing a

value to a counterparty, which we get some compensation.

MR. JEPPERSON: We have a gathering company and

we\'re always looking for ways to provide services to the

larger producers and to give them points of market that they

might not otherwise have and to see if we can\'t find a way

for them to enhance their business.

CHAIRMAN WOOD: Any other questions?

Thank you very much and we\'ll open the floor to

anyone in the audience who would like to comment on matters

we\'ve been dealing with today.

Mr. Lively?

COMMISSIONER HARVEY: I should note for anybody

interested in comments there are microphones at the corners

in here and we\'re happy to hear from you.

MR. LIVELY: My name is Mark Lively. I\'m a

consulting engineering from Gaithersburg, Maryland.

I was listening to the comments about market

liquidity and the way I understand market liquidity is that

you want to be able to dump your long positions or to make

the shortages without penalty. And, to the extent that you

can do that that says market has the market has some

liquidity.

Well, I look at the market as somewhat of a

masonry wall. We have these bricks with cement around it.

Sometimes these bricks are maybe a 100 megawatt contract for

an hour or a 50,000 MCF contract for a day. Or maybe it\'s a

concrete block that sometimes gets put in there and then you

have to arrange how the bricks fit in with the concrete

block. Or maybe it\'s this great big stone wall over here

along First Street backing up Union Station and you have

huge blocks. But the question is, you\'ve go to have this

masonry, this mortar, cement to fill up the seams and that

determines whether you\'ve got some liquidity. But you have

to have a way to price that cement. And the way that I see

it is that we need to have ways to price those unscheduled

flows of the electricity or those gas imbalances, because if

we have that way to do that, then the brick wall, the

masonry wall stays up. Whereas, if you don\'t have a way to

have that cement, it will fall down.

I noticed that about a year and a half a go,

India decided that they were going to put in a way to price

what they call unscheduled interchange where they provided a

liquidity for the market and it\'s a one‑step wall‑raising

option. What happened to the Indian market after they put

in this pricing mechanism for UI? Objective measures of the

Indian electric system shows that they have improved their

operations by a factor of 5 to 10. There was suppose to be

the director of the ‑‑ or one of the regulators from India

was suppose to be here making a presentation to FERC about a

month ago, a guy name Banu Ushin, who had developed this

procedure when he was with Indian Power Grid. But it

provides a way to have that liquidity.

Now it allows people who are long to dump the

electricity. It allows the people that are short to buy

their shortages. Now, if you\'re long and you dump too much

electricity, you\'re going to depress the price in the Indian

market. If you\'re short, and you suck up too much

electricity, you\'re going to increase the price. So it\'s

not a thick market, but it is a market that provides this

cement to hold the blocks together.

In the United States, for natural gas, this

cement is somewhat provided by the pipelines. If someone

over delivers in an area, that\'s a gas imbalance and the gas

pipeline takes that as a gas imbalance and pays some price

for it. Similarly, if someone is short, the pipeline

delivers and it gets a price for what it delivers. That

provides some market liquidity to the United States. We

also have the issue for electricity how to pay for reactive

power. I noticed that the Massachusetts DTE included

pricing reactive power as part of their distributive

generation case last month.

Those are issues that I believe are necessary to

address the liquidity issue is to price that which is

unscheduled, whether it is unscheduled electricity, which

India has, at least, the beginnings of a solution to,

whether it is unscheduled gas imbalances, which the

pipelines have to buy and sell a little bit, but the

mechanisms that the gas pipeline use to buy and sell doesn\'t

have that facility that I mentioned earlier. That when

there\'s a shortage, that the price increases and when there

is too much gas, you should see the price decrease because

of that imbalance. Thank you.

COMMISSIONER HARVEY: Thank you very much.

Anyone else?

MR. KAMINSKI: May I comment on this?

COMMISSIONER HARVEY: Sure.

MR. KAMINSKI: Well, I have to say that this was

a very profound comment because it goes to the heart of the

problems we have in the energy market. As a matter of fact,

this is one of the biggest disasters I\'ve seen in energy

trade because one company that was daily, four‑ and eight‑

hour options on power and under the conditions that the

traded contracts were only for the 16 hour blocks. So this

means that the company had to sell the wings corresponding

to the areas outside those four‑ and eight‑hour blocks of

power and there were very few takers.

But the biggest problem we have in the energy

market is that we are dealing with so‑called incomplete

markets. So this means that we have risks in the system and

no corresponding through publicly‑traded contracts that

allow to price and manage the risks related to those risks.

So I agree. The biggest challenge we have is that we have

some risk for which we have no corresponding prices. If

there is an easy solution to this problem, that would great.

But this is something that long‑term police and energy

police should look into.

COMMISSIONER HARVEY: Great. Thank you.

Yes, sir?

MR. ELDUFF: My name is Doug Elduff. I\'m in the

research of the New York Mercantile Exchange and on the

question of liquidity and, perhaps, the lack of in the back

of the curve, particularly, my comment is pointing to the

natural gas market. The relation to the lack of liquidity

and, perhaps, the profile of those traders that make up the

top tier of the market today and how that\'s changed from

three, four years ago. The profile of those who were at the

top of the market four or five years ago was such that they

had a significant amount of capital that was employed as

propriety trading. They were the risk managers and the ones

willing to take a measured risk for the sake of profit and I

think there is a great deal less risk capital at play in

today\'s markets, which is going to result in lower liquidity

in the back of the curve, even for end users who spoke

earlier and said they just can\'t find liquidity where they

once did. It was those types of players who put risk

capital at play who did provide that liquidity and they are

not there today for various reasons. Some because the

companies are no longer in business. Some because the

perception is that kind of risk capital being dispatched by

public companies is a bad thing and Wall Street has pushed

us in that direction.

So, if there are policies that can be fostered

that will improve liquidity, it\'s all about providing

certainty to participants who can come in and know that in a

relatively safe business environment they can dispatch this

capital into markets and provide liquidity further out the

curve.

MR. O\'NEILL: Let me ask you a question. Did you

sort of imply that Wall Street overreacted to the recent

crisis?

MR. ELDUFF: I guess that\'s my opinion, not

necessarily of NYMEX.

MR. O\'NEILL: Okay.

Do you folks have opinions on whether or not the

Street overreacted?

(No response.)

COMMISSIONER HARVEY: Apparently not.

Thank you very much. Anyone else?

Does anyone up here have any final comments or

thoughts to contribute?

Well, I thank everyone for their contribution.

It\'s been very, very helpful and will help us with moving

forward. Thank you.

(Whereupon, at 4:25 p.m., the conference was

concluded.)