a

GAO

United States Government Accountability Office

Report to the Ranking Minority Member, 

Committee on Energy and Natural 

Resources, U.S. Senate

December 2005 NATURAL GAS AND 

ELECTRICITY 

MARKETS

Federal Government 

Actions to Improve 

Private Price Indices 

and Stakeholder 

Reaction

GAO-06-275
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

December 2005 

NATURAL GAS AND ELECTRICITY 

MARKETS 

Federal Government Actions to Improve 

Private Price Indices and Stakeholder 

Reaction 

Highlights of GAO-06-275, a report to the 

Ranking Minority Member, Committee on 

Energy and Natural Resources, U.S. 

Senate 

 

Since the 1970s, the natural gas and 

electricity industries have each 

undergone a shift toward greater 

competition, referred to as

restructuring. This restructuring 

has moved these industries from

regulated monopolies to markets in 

which competitors vie for market 

share and wholesale prices are 

largely determined by supply and 

demand. Amid this restructuring, 

private companies have published 

information about these markets,

including reports of market prices

in various locations—referred to as

price indices. These indices, 

whether for short-term “spot” or 

long-term “forward” markets, are 

developed by surveying selected

market participants who 

voluntarily supply price 

information. Market participants 

rely on these price indices to help

them make informed decisions 

about trading these commodities 

and to evaluate new investments.

In recent years, confidence in price

indices has been shaken due to

misreporting and other abuses. 

During the energy crisis in the West

in 2000-2001, several market 

participants were found to have 

purposefully misreported prices in

order to manipulate these indices 

for financial gain. 

In this context, GAO agreed to

answer the following questions: (1)

What federal regulatory and 

statutory efforts have been taken to

improve price indices in electricity

and natural gas markets? (2) Have

federal efforts improved industry

stakeholders’ confidence in these 

price indices?

Since 2003, the federal government has undertaken a series of regulatory and 

statutory efforts to improve the availability and accuracy of price 

information in price indices. First, FERC issued standards on voluntary 

price reporting and rules of conduct in a July 2003 policy statement. Second, 

FERC has taken steps to improve its ability to monitor price indices and 

enforce market rules by (1) reviewing wholesale prices for anomalies that 

could indicate market problems and (2) collaborating with other entities, 

such as the Commodity Futures Trading Commission (CFTC), and 

independent market monitoring units that monitor organized electricity 

markets to detect market manipulation. Third, the Energy Policy Act— 

enacted in August 2005—increases the amount and types of civil penalties 

that FERC may impose on companies that participate in anticompetitive 

behavior, including knowingly misreporting price information to index 

developers and gives FERC authority to collect additional transaction 

information if such information is necessary to ensure price transparency. 

Fourth, FERC and the CFTC entered into a memorandum of understanding 

to share and coordinate requests for information, which they say will allow 

FERC to more readily identify and sanction market manipulation. 

Many industry stakeholders reported that they now have greater confidence 

in most price indices, but some expressed concern about price indices for 

long-term electricity markets. FERC reported that stakeholders are 

generally satisfied with current price indices and that the quality of 

information has improved. For example, in a recent survey FERC found that 

two-thirds of respondents reported their confidence in price indices, on a 

scale of 1 to 10 (10 being most confident), as a 7 or greater. Further, FERC

reported that since 2002 the quality of information has improved because (1) 

more companies are reporting data to publishers and (2) major publishers 

are providing more information about the number of transactions and 

volume of electricity and natural gas trades. GAO’s own investigations 

corroborated what FERC found in its survey. Specifically, natural gas and 

electricity industry stakeholders reported that, in general, they are 

reasonably confident in the short-term prices now reported by trade 

publications and the improved quality of overall information. While 

stakeholders expressed general satisfaction with most price indices, some

reported concerns about price indices in long-term electricity markets. 

Furthermore, stakeholders are now able to see that some of these markets 

witness fewer transactions and, as a result, are less developed than others. 

In the absence of a reliable long-term electricity market and information 

about prices, market participants noted that they rely on long-term natural 

gas markets and indices that are more developed. Stakeholders told GAO 

that, because natural gas is widely used to generate electricity, their prices 

often move together and, therefore, natural gas forward prices can 

substitute, to some extent, for electricity futures prices. They also said that 

the use of these natural gas markets only partly mitigates the lack of robust 

long-term electricity markets, because electricity and natural gas prices

sometime move independently. 

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

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jim Wells at 

(202) 512-3841 or Wellsj@gao.gov. 
Page i GAO-06-275 Price Indices

Contents

Letter 1

Results in Brief 2

Background 4

The Federal Government Has Undertaken Multiple Efforts to 

Improve Price Indices 6

Industry Stakeholders Are Reasonably Confident in Most Price 

Indices 8

Concluding Observations 11

Agency Comments 11

Scope and Methodology 11

Appendixes

Appendix I: Comments from the Federal Energy Regulatory 

Commission 13

Appendix II: GAO Contact and Staff Acknowledgments 14

Figure Figure 1: Customer Satisfaction with Price Indices in 2004 9

Abbreviations

CFTC Commodity Futures Trading Commission

FERC Federal Energy Regulatory Commission

FTC Federal Trade Commission 

ISO Independent System Operators 

NARUC National Association of Regulatory Utility Commissioners 

RTO Regional Transmission Organizations

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

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reproduce this material separately.
Page 1 GAO-06-275 Price Indices

United States Government Accountability Office

Washington, D.C. 20548

A

December 15, 2005 Letr

The Honorable Jeff Bingaman

Ranking Minority Member, Committee on

Energy and Natural Resources

United States Senate

Dear Senator Bingaman:

Since the late 1970s, the natural gas and electricity industries have each 

undergone a shift toward greater competition, referred to as restructuring. 

This restructuring has moved these industries from ones in which local 

monopoly utilities provided services and regulators set prices to ones in 

which competitors vie for market share, and wholesale prices are largely 

determined by supply and demand. Amid this restructuring, private 

companies have routinely published information about these markets, 

including reports of market prices in various locations—referred to as 

price indices—developed by surveying market participants who voluntarily 

supply price information. In some cases, these price indices refer to shortterm markets—so called “spot” markets where the electricity or natural gas 

is sold for delivery in the near term (e.g., the next hour or the next day). In 

other cases, price indices refer to long-term markets, such as “forward” 

and other markets—for the purposes of this report, we refer to all of these 

as occurring in long-term markets—where the delivery of natural gas or 

electricity is expected to occur in the future (e.g., 30 days, 1 year, or 

longer). Utility companies and other energy market participants rely on 

these price indices to help them make informed decisions about buying and 

selling electricity and natural gas and as a guide for potential new 

investments. Because price indices play such a pivotal role in the market, it 

is vital that energy market participants have confidence that these indices 

are robust, transparent, reliable, and accurate. To help ensure that 

wholesale market prices are fair and that the information in price indices is 

reliable and accurate, the Federal Energy Regulatory Commission (FERC) 

has issued regulatory rules supporting competition, routinely monitored 

markets for anticompetitive behavior, and enforced and revised market 

rules as needed. 

In recent years, confidence in price indices had been shaken due to 

misreporting and other abuses. Most notably, during the energy crisis in 

California and the West in 2000-2001, several market participants were 

found to have purposefully misreported prices in order to manipulate these 

indices for financial gain. As part of FERC’s efforts to remedy price 
Page 2 GAO-06-275 Price Indices

manipulation and consumer overcharges that occurred during that 

electricity crisis, it has ordered more than $4 billion in refunds. In addition 

to concerns about misreporting, some market participants have noted that 

the entities that publish price indices often failed to convey information 

necessary for them to assess the quality and validity of the indices, such as 

information about the volume of transactions represented and the number 

of participants trading at various locations. As a result, some stakeholders 

raised concerns about the federal government’s ability to adequately 

regulate and oversee natural gas and electricity markets and the reliability 

and accuracy of prices reported in indices. 

In this context, we agreed to answer the following questions: (1) What 

federal regulatory and statutory efforts have been taken to improve price 

indices in electricity and natural gas markets? (2) Have federal efforts 

improved industry stakeholders’ confidence in these price indices? To 

answer these questions, we reviewed federal reports documenting efforts 

to improve price transparency and examined literature on price 

transparency in the natural gas and electricity markets. In addition, we 

interviewed officials at FERC, representatives of relevant trade 

associations, and experts. We examined FERC survey data and assessed its 

reliability by reviewing existing information about the data, interviewing 

agency officials knowledgeable about the data, and examining comments 

by the entities surveyed. We conducted our work from June 2005 to 

November 2005 in accordance with generally accepted government 

auditing standards. 

Results in Brief Since 2003, the federal government has undertaken a series of regulatory 

and statutory efforts to improve the availability and accuracy of price 

information in price indices. First, FERC issued standards on voluntary 

price reporting and rules of conduct in a July 2003 policy statement. 

Second, FERC has also taken steps to improve its ability to monitor price 

indices and enforce market rules by reviewing wholesale prices for 

anomalies that could indicate market problems. In this regard, FERC has 

also collaborated with other entities, such as the Commodities Futures 

Trading Commission (CFTC) that oversees futures markets, some of which 

are tied to long-term markets for electricity and natural gas and 

independent market monitoring units that monitor organized electricity 

markets to detect market manipulation. Third, the Energy Policy Act—

enacted in August 2005—increases the amount and types of civil penalties 

that FERC may impose on companies that engage in anticompetitive 

behavior, including knowingly misreporting price information to index 
Page 3 GAO-06-275 Price Indices

developers, and gives FERC authority to collect additional transaction 

information if such information is deemed necessary to ensure price 

transparency. Fourth, in response to requirements in the Energy Policy Act, 

FERC and the CFTC entered into a memorandum of understanding to share 

and coordinate requests for information, which they say will allow FERC to 

more readily identify and sanction market manipulation.

Many industry stakeholders report that they now have greater confidence 

in most price indices, but some expressed concerns about price indices for 

long-term electricity markets, such as price indices reported for forward 

energy trades. For example, in a recent survey, FERC found that two-thirds 

of respondents reported their confidence in price indices, on a scale of 1 to 

10, as a 7 or greater (10 being most confident). Further, FERC reported that 

since 2002, the quality of information has improved because more 

companies are reporting transaction data to publishers of price indices and 

because major price index publishers are providing greater information 

about the number of transactions and volume of electricity and natural gas 

bought or sold at specific trading locations. Our own investigations 

corroborated what FERC found in its survey. Specifically, in our meetings 

with natural gas and electricity industry stakeholders, they reported that, in 

general, they are reasonably confident in the prices now reported by trade 

publications. They also noted that the quality of overall information has 

improved, which has increased their confidence that these indices can be 

used to evaluate potential new investments. While stakeholders expressed 

general satisfaction with most price indices, some reported concerns about 

price indices for long-term electricity markets. Specifically, they now 

recognize that some of these long-term markets witness fewer transactions 

and, as a result, are less developed and less reliable than their short-term 

counterparts. Consistent with this, stakeholders told us that it is sometimes 

difficult to find a willing trading partner in some long-term electricity 

markets. In the absence of reliable information on long-term electricity 

prices, electricity market participants noted that they instead trade in more 

developed long-term natural gas markets as a substitute. These 

stakeholders explained that, because natural gas is used extensively to 

generate electricity, natural gas and electricity prices often move together 

and, therefore, natural gas forward prices can substitute, to some extent, 

for electricity futures prices. However, they also said that the availability 

and use of these long-term natural gas markets only partly mitigate the lack 

of robust long-term electricity markets, because electricity and natural gas 

prices can and do sometimes move independently. 
Page 4 GAO-06-275 Price Indices

Background The natural gas and electricity industries perform three primary functions 

in delivering energy to consumers: (1) producing the basic energy 

commodity, (2) transporting the commodity through pipelines or over 

power lines, and (3) distributing the commodity to the final consumer. 

Historically, many local utilities in the electricity sector built their own 

systems of power plants and electricity transmission and distribution lines 

to serve the needs of all consumers in their local areas. Similarly, natural 

gas companies built networks of pipelines to deliver natural gas from areas 

where it was produced to the markets where local distribution companies 

served all local customers. These local monopolies were overseen by 

regulators, who restricted the entry of new companies and also approved 

investments, approved prices paid by customers, and determined profits of 

these utilities. However, due to rising electricity prices and technological, 

economic, and policy developments beginning in the 1970s, the electricity 

and natural gas industries have restructured from a regulated environment 

to one that places greater reliance on competition to determine entry, 

investment, prices, and profits. The passage of the Natural Gas Policy Act 

of 1978, the Natural Gas Wellhead Decontrol Act of 1989, and subsequent 

FERC orders in 1985 and 1992 opened access to pipelines and required 

pipeline companies to completely separate transportation, storage, and 

sales services, all of which facilitated the shift of natural gas to more 

competitive markets. Similarly, the 1978 passage of the Public Utility 

Regulatory Policies Act of 1978 and the 1992 passage of the Energy Policy 

Act facilitated restructuring in the electricity industry. FERC built upon 

these efforts through major regulatory actions in 1996 and 1999 that 

required utilities under its jurisdiction to, among other things, provide 

nonutility companies that generated electricity with access to the utility’s 

interstate transmission lines and encouraged utilities to join in the creation 

of independent organizations to operate the transmission system, such as 

Independent System Operators (ISO) and Regional Transmission 

Organizations (RTO). 
Page 5 GAO-06-275 Price Indices

Under federal statutes, FERC is the principal federal agency that regulates 

the natural gas and electricity industries to ensure that wholesale 

electricity and natural gas prices are fair.1

 FERC is responsible for 

developing and maintaining the regulatory framework that approves or 

otherwise influences the utilities’ terms, conditions, and rates for the sale 

or resale and transmission of natural gas and electricity in interstate 

commerce. Historically, to ensure that the prices these utilities charged 

were just and reasonable, FERC regulated rates by basing the prices on the 

utilities’ costs to provide service plus a fair return on investment. Now, 

FERC seeks to ensure that wholesale natural gas and electricity prices are 

just and reasonable by promoting competitive markets, issuing market 

related rules that encourage efficient competition, and enforcing and 

correcting market rules as needed. 

In the newly restructured markets, many energy market participants rely 

on price information obtained from various sources, including price indices 

published in trade press because some companies can be reluctant to freely 

provide data on purchases and sales. Private companies develop these 

price indices by collecting information about market prices from market 

participants in a variety of ways, including phone calls to individuals within 

energy trading companies. Market participants use these indices to, among 

other things, help them make informed decisions about buying and selling 

natural gas and electricity. For example, energy market participants use 

price indices as a benchmark in reviewing the prudence of gas and 

electricity purchases and often reference price indices in the contracts they 

develop for gas and electricity purchases. As part of its market oversight 

efforts, FERC also monitors these price indices to detect anticompetitive 

behavior. 

Other federal agencies have roles affecting the electricity and natural gas 

markets. The Commodity Futures Trading Commission (CFTC) oversees 

markets and transactions related to the sale of commodity and financial 

futures and options, while the Federal Trade Commission (FTC) and 

Department of Justice police deceptive selling practices. In addition to 

1

Established in 1977 as the successor to the Federal Power Commission, FERC is an 

independent agency that is the principal agency that regulates the electricity industry. Some 

entities, including the Tennessee Valley Authority and the Department of Energy’s four 

Power Marketing Administrations, as well as publicly owned utilities, public power districts, 

and irrigation districts, as well as most cooperatively owned utilities, are outside of FERC’s 

jurisdiction.
Page 6 GAO-06-275 Price Indices

these federal agencies, states also oversee aspects of natural gas and 

electricity delivery, often through public utility commissions. 

The Federal 

Government Has 

Undertaken Multiple 

Efforts to Improve 

Price Indices 

Since 2003, FERC has undertaken a series of efforts to improve the 

availability and accuracy of price information, including specifically 

addressing price indices. In 2000 and 2001 during the energy crisis in the 

West, some market participants knowingly misreported data to index 

providers in order to influence these indices for financial gain. Following 

that, FERC convened a series of conferences and workshops that included 

regulators, energy market participants, price index publishers, and industry 

experts. One of these events included participation by the CFTC and 

another included participation by the National Association of Regulatory 

Utility Commissioners (NARUC).2

 As a result of these efforts, FERC staff 

developed a better understanding of market participants’ desired 

characteristics of the price indices and behavior of other market 

participants. These conferences and workshops also revealed some 

practical short- and long-term solutions to problems such as how market 

price indices are developed and why reduced energy trading activity was 

occurring.

Using the information that it developed through its conferences and 

workshops, FERC developed new standards and rules of conduct for both 

market participants submitting trade data and for price index publishers, to 

help ensure that price indices were more accurate and reliable and to 

strengthen market participants’ confidence in price indices. FERC outlined 

the standards that energy market participants and index developers should 

follow in a 2003 policy statement. According to FERC, these standards 

were designed to encourage standardization in the voluntary reporting of 

price and other market information, among other things, and to assure 

companies that they will not be subject to administrative penalties for 

inadvertent errors in reporting.3

 These standards also encourage energy 

2

NARUC is a membership association of regulatory commissioners that, among other things, 

is designed to study subjects concerning the operation of public utilities.

3

To encourage a greater volume of price reporting by these companies, FERC presumes that 

companies that report trade data in accordance with the standards of the Policy Statement 

are doing so in good faith and, thus, these companies will not be subject to administrative 

penalties for inadvertent errors in reporting—commonly referred to as “safe harbor.” 

FERC’s guidance also stipulates that companies should verify the accuracy and 

completeness of the transaction data before submitting them. 
Page 7 GAO-06-275 Price Indices

market participants to report not only prices but also the volume of the 

traded commodity and the date and time of the transaction, and encourage 

the entities that publish price indices (e.g., Platts, Natural Gas Intelligence, 

and Dow Jones) to also publish this relevant market information. In 

addition, FERC standards encourage index publishers to verify the price 

data obtained from companies that provide price data, to indicate when a 

published price is an estimate made by the publisher rather than data 

reflecting only the results of actual trades, and to monitor the data to 

identify attempts to manipulate energy price indices. Finally, FERC 

standards encourage price index publishers to explain to users how the 

index is developed and include the formulas used to calculate the index. 

With regard to rules of conduct, FERC issued two orders in November 2003 

designed to establish clear guidelines for sellers of wholesale electricity 

and natural gas subject to its jurisdiction.4

 These guidelines prohibit 

actions that do not have a legitimate business purpose and are capable of 

manipulating prices. For example, they prohibit submitting false or 

misleading information to FERC or price index publishers. 

FERC has also taken steps to improve its ability to monitor price indices 

and enforce related market rules. Recently, we reported that FERC had 

made significant efforts to revise its oversight approach to better align with 

its new role in overseeing restructured markets. In particular, we have 

reported that through the establishment of its Office of Market Oversight 

and Investigations in 2002, FERC had taken a more proactive approach to 

monitoring by reviewing large amounts of data, including wholesale prices, 

for anomalies that could lead to potential market problems.5

 In addition, 

FERC, which oversees the operators of electricity grids, including ISOs and 

RTOs, has worked with these organizations’ market monitoring units—

many of which collect substantial amounts of information on prices and 

other data to determine, among other things, whether prices are the result 

of fair competition or appear to be a result of market manipulation. 

4

As previously discussed in this report, some entities, including the Tennessee Valley 

Authority and the Department of Energy’s four power marketing administrations, as well as 

publicly owned utilities, public power districts, and irrigation districts, as well as most 

cooperatively owned utilities, are outside of FERC’s jurisdiction.

5

GAO, Energy Markets: Additional Actions Would Help Ensure That FERC’s Oversight and 

Enforcement Capability Is Comprehensive and Systematic, GAO-03-845 (Washington, 

D.C.: Aug. 15, 2003).
Page 8 GAO-06-275 Price Indices

Finally, the passage of the 2005 Energy Policy Act included FERC’s 

proposed statutory changes to address misconduct of market participants 

by increasing civil penalties imposed on companies that participate in 

anticompetitive behavior or manipulate the market. These changes 

increase FERC’s ability to levy civil penalties under existing laws, raising 

potential fines to as much as $1 million per day per violation for as long as 

the violation continues.6

 A FERC official said that increasing civil penalties 

would allow it to more effectively deter market manipulation and 

misconduct that is damaging to competitive markets. Moreover, FERC 

officials said that it would lead to greater certainty for market participants, 

thereby increasing participation in markets. The Energy Policy Act also 

gives FERC authority to collect transaction information if necessary to 

ensure price transparency. A FERC official said that this authority would 

give FERC additional tools if the current voluntary system of reporting 

prices to price index publishers proves inadequate. In addition, in response 

to requirements in the Energy Policy Act, FERC and the CFTC entered into 

a memorandum of understanding to share and coordinate requests for 

information, which they say will allow FERC to more readily identify and 

sanction market manipulation.

Industry Stakeholders 

Are Reasonably 

Confident in Most 

Price Indices

Many industry stakeholders report that they are now reasonably confident 

in short-term price indices, although some concerns about the 

transparency of long-term electricity markets remain. As part of its effort to 

assess its efforts to improve price indices, FERC surveyed industry 

participants in March 2004, asking them to rate their confidence in price 

indices—with 1 representing no confidence and 10 representing total 

confidence that price indices accurately represent market pricing. 

Confidence in price indices ranged from an average of 7.5 for gas utilities to 

6.7 for marketers, with nearly half reporting a confidence of 8 or greater.7

(See fig. 1.) In addition, in 2004, FERC reported that price index publishers 

have submitted information showing that the volume and number of 

transactions have increased significantly since 2002 and is influenced by at 

least two factors. First, companies that had been reporting transactions 

began reporting more transactions to publishers of price indices. Second, 

companies that had not been reporting had begun reporting transactions to 

6

Energy Policy Act of 2005, Pub. L. No. 109-58, Sections 314(b) and 1284(e).

7

A limitation of the 2004 survey is that it is not a random, statistically representative sample 

of industry participants.
Page 9 GAO-06-275 Price Indices

publishers of price indices. Furthermore, many of the companies reporting 

in 2004 are among the industry’s larger and more active participants. 

Figure 1: Customer Satisfaction with Price Indices in 2004

Consistent with what FERC found, industry trade and research 

organizations and others that we interviewed reported to us that their 

members have few significant concerns about the short-term, also called 

spot, price indices or long-term natural gas indices. They report that, 

overall, FERC’s efforts to improve the transparency of spot price indices 

achieve sufficient oversight without being heavy-handed. In addition, 

industry participants told us that the quality of data being provided to 

publishers of price indices has improved since 2002. For example, 

according to a major price index publisher, the reporting of price 

information has significantly improved in the last 2 years, and, further, the 

quality of analysis and reliability of the prices that they report has 

improved. Finally, publishers are providing more information about the 

market, such as the number of transactions and the amounts of energy 

bought and sold at specific trading locations. For example, a major 

publisher reported to us that, as of August 2004, it includes volume and 

transaction data for each pricing point in the spot market. 

0

10

20

30

40

50

60

70

1 2 3 4 5 6 7 8 9 10

Number of respondents (percentage)

1% 1%

3%

12% 11%

3%

Level of satisfaction (1-10)

Source: GAO analysis of FERC data.

22%

34%

12%

1%

● Industrial consumer (average 7.43)

● Gas utility (average 7.49)

● Electric utility (average 7.21)

● Generator (average 7.02)

● Producer (average 7.22)

● Marketer (average 6.74)
Page 10 GAO-06-275 Price Indices

Despite their general satisfaction with most price indices, some 

stakeholders reported concerns about price indices for long-term 

electricity markets. In particular, representatives of one trade organization 

told us that while data regarding spot prices and long-term natural gas 

prices have improved, they still have concerns about electricity prices 

involving long-term purchase arrangements and similar long-term contracts 

(e.g., forward and futures markets, where long-term contracts for 

electricity and related financial instruments are bought and sold).8

 

Stakeholders are now able to see that these markets witness fewer 

transactions and, as a result, are less developed than others. One factor 

affecting price transparency in these long-term markets is that the use of 

these markets collapsed in 2002 over concerns that prices were 

manipulated. This collapse, in turn, has resulted in fewer market 

participants and a market that is less developed, making it difficult for 

those still wanting to participate in these markets to find a willing trading 

partner. In addition, two stakeholders told us that there are not many 

options for obtaining data regarding longer term energy market 

transactions. Complicating this concern, FERC does not have jurisdiction 

for overseeing futures markets and has only a limited direct role in longterm markets. As a result, FERC does not formally collect extensive data 

on futures or long-term markets.9

 As a result, one energy market 

participant reported that it relies on limited data when developing or 

valuing long-term electricity contracts. In the absence of a mature and 

reliable long-term electricity market and information about prices, market 

participants noted that for now they rely on long-term natural gas markets 

and indices, which are more developed. These market participants told us 

that because natural gas is used extensively to generate electricity, the 

prices often change together. They also said that the availability and use of 

these natural gas markets only partly mitigates the lack of robust electricity 

markets, because electricity and natural gas prices can, and do, sometimes 

move independently. 

8

Futures contracts are financial arrangements, such as contracts tied to prices of electricity 

or natural gas to be delivered in the future, and are used to protect companies from price 

changes.

9

CFTC has jurisdiction over certain futures markets where financial instruments are sold. 

However, some forward physical and financial markets, including electronic trading 

systems such as the Intercontinental Exchange, are exempt from much, but not all, of the 

CFTC’s jurisdiction.
Page 11 GAO-06-275 Price Indices

Concluding 

Observations

The move away from regulators setting prices and toward markets where 

prices are increasingly a function of competition has raised the importance 

of price indices as a mechanism to communicate information to the 

market. In recent years, market participants have used these indices in 

structuring their transactions and regulators have used them to judge how 

the market is performing. As a result, it is important that they accurately 

and reliably reflect actual prices. 

The federal government has taken a number of steps to encourage 

improved availability and accuracy of price indices, which has increased 

industry confidence in price and other market information provided in spot 

price indices. Although federal efforts appear to have had a positive impact 

on short-term (spot) price indices, some concerns remain about price 

indices for long-term electricity markets. It does not appear that there is an 

easy way to improve reporting on these long-term electricity markets until 

the markets themselves mature. Because of the importance of price 

indices, it will be important for FERC, Congress, and others to remain 

vigilant in their monitoring of existing price indices and attentive for 

alternatives to address the remaining issues in longer term markets. 

Agency Comments We provided a copy of our draft report to FERC for comment. FERC 

provided written comments, which are presented in appendix I. In its 

comments, FERC generally agreed with our findings and conclusions. In 

addition, FERC provided a variety of technical and other comments, which 

we incorporated as appropriate. 

Scope and 

Methodology

To obtain information about efforts FERC has taken to improve natural gas 

and electricity price indices, we reviewed reports and other documents 

describing federal efforts to improve price transparency and examined 

literature on price transparency in the natural gas and electricity markets. 

In addition, we interviewed government officials at FERC, representatives 

of trade associations, and industry and academic experts in the field. We 

assessed the reliability of FERC confidence survey data by reviewing the 

survey instrument and methodology used to tabulate results, interviewing 

relevant agency officials knowledgeable about the data to understand any 

limitations of the data, and corroborating results by interviewing some of 

the entities surveyed. 
Page 12 GAO-06-275 Price Indices

We conducted our work from June 2005 to November 2005 in accordance 

with generally accepted government auditing standards.

We are sending copies of this report to the Chairman of FERC as well as 

other appropriate congressional committees. We also will make copies 

available to others upon request. In addition, the report will be available at 

no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me 

at (202) 512-3841 or Wellsj@gao.gov. Contact points for our Office of 

Congressional Relations and Office of Public Affairs may be found on the 

last page of this report. GAO staff who contributed to this report are listed 

in appendix II.

Sincerely yours,

Jim Wells

Director, Natural Resources 

and Environment
Page 13 GAO-06-275 Price Indices

Appendix I

Comments from the Federal Energy Apendxies

Regulatory Commission ApendxiI
Page 14 GAO-06-275 Price Indices

Appendix II

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Jim Wells (202) 512-3841

Staff 

Acknowledgments

In addition to the individual named above, Jon Ludwigson, Kristen Massey, 

Frank Rusco, Barbara Timmerman, Alison O’Neill, Chris Pacheco, and Kim 

Wheeler-Raheb made key contributions to this report. 

(360590)
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

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