2003/04 Winter Energy Market Assessment

November 13, 2003 

Office of Market Oversight and Investigations 

Federal Energy Regulatory Commission
2

Progress is being made on issues identified by 

OMOI in earlier assessments.

Concerns in previous 

assessments

November 2003 status

Deteriorating financial 

conditions

$60 billion of market cap gained by major market participants in 

2003 

Credit deratings have slowed

Managing credit exposure More than $30 billion of stressed debt refinanced (only one 

company’s debt defaulted) 

Continued credit clearing initiatives with mixed results, reducing 

capital requirements

Shaken confidence in price 

discovery

FERC Policy Statement (July 2003) 

Revised trade press procedures 

ICE-initiated price reporting

Continuing potential for 

manipulation

Isolated incidents

Strained natural gas 

supply

Improved conditions going into the heating season due to record 

refill of storage 
3

After a decade of low prices, natural gas prices 

are now more volatile at a higher level.

Sources: Nymex, EIA and Bureau of Labor Statistics. Data current through May 2003.

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

Jan-76Jan-78Jan-80Jan-82Jan-84Jan-86Jan-88Jan-90Jan-92Jan-94Jan-96Jan-98Jan-00Jan-02Jan-04

P

ric

e ($/M

M

Btu)

Monthly price (real 2003 dollars)

Monthly price (nominal dollars) Futures strip (from Nov. 5, 2003)
4

Long-term supply uncertainty keeps up prices—

e.g., NPC study shows prices likely to remain 

high through 2025.

Annual Average Henry Hub Prices

Source: National Petroleum Council, “Balancing Natural Gas Policy: Fueling the Demands of a Growing Economy,” September 2003.

2005 2010 2015 2020 2025

Reactive Path

Balanced Future

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$0.00

Price ($/MMBtu, $2002)
5

Natural gas storage rebound significantly

improved the prospects for winter 2003/04.

• Stronger storage position than anticipated, mitigating prices 

• Storage position critical—relationship with price 

• Protection comes at a cost 

• Relative cost depends on weather 

• Use of storage over the last two years has pushed the upper and lower limits of capacity 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

V

olu

m

e (B

cf)

5-year range (98/99-02/03)

2003-04

2002-03

Source: EIA, Form EIA-912, “Weekly Underground Natural Gas Storage Report. Data through week ending October 31, 2003.
6

5-year average storage

$0

$2

$4

$6

$8

$10

$12

-800 -600 -400 -200 0 200 400 600 800

Storage deviations from "same week" 5-year average (Bcf)

H

e

nry

H

u

b

w

e

e

kly

a

v

era

g

e

s

p

ot pric

e

s ($/M

M

Btu)

Storage inventory has a strong relationship with 

price levels and volatility.

Source: OMOI analysis based on RDI and EIA.
7

5-year average storage

$0

$2

$4

$6

$8

$10

$12

-800 -600 -400 -200 0 200 400 600 800

Storage deviations from "same week" 5-year average (Bcf)

H

e

nry

H

u

b

w

e

e

kly

a

v

era

g

e

s

p

ot pric

e

s ($/M

M

Btu)

Storage inventory has a strong relationship with 

price levels and volatility.

Feb 2003

Source: OMOI analysis based on RDI and EIA.
8

5-year average storage

Storage inventory has a strong relationship with 

price levels and volatility.

Mar Feb 2003

2003

$0

$2

$4

$6

$8

$10

$12

-800 -600 -400 -200 0 200 400 600 800

Storage deviations from "same week" 5-year average (Bcf)

H

e

nry

H

u

b

w

e

e

kly

a

v

era

g

e

s

p

ot pric

e

s ($/M

M

Btu)

Source: OMOI analysis based on RDI and EIA.
9

5-year average storage

$0

$2

$4

$6

$8

$10

$12

-800 -600 -400 -200 0 200 400 600 800

Storage deviations from "same week" 5-year average (Bcf)

H

e

nry

H

u

b

w

e

e

kly

a

v

era

g

e

s

p

ot pric

e

s ($/M

M

Btu)

Storage inventory has a strong relationship with 

price levels and volatility.

Mar Feb 2003

2003

Apr-Oct 2003

Source: OMOI analysis based on RDI and EIA.
10

But forward prices indicate that resulting 

storage inventory costs may be high.

$4.00

$4.20

$4.40

$4.60

$4.80

$5.00

$5.20

$5.40

$5.60

$5.80

Dec-03

Jan-04

Feb-04

Mar-04

Apr-04

May-04

Jun-04

Jul-04

Aug-04

Sep-04

Oct-04

P

ric

e ($/M

M

Btu)

Estimated cost of

gas in storage = $5.25

Heating season

strip (Nov. 5, 2003)

Next injection season strip

(Nov. 5, 2003)

Difference between cost of

gas in storage and futures

strip (Nov. 5, 2003)

Source: Platts’ Gas Daily, Nymex, and EIA. Cost of gas in storage is estimated using the volume-weighted average Henry Hub weekly gas prices over the 

2003 injection cycle and does not reflect holding costs.
11

Last winter, storage inventory costs were 

relatively low.

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

Nov-02

Dec-02

Jan-03

Feb-03

Mar-03

Apr-03

May-03

Jun-03

Jul-03

Aug-03

Sep-03

Oct-03

P

ric

e ($/M

M

Btu)

Estimated cost of

gas in storage = $3.33

Heating season

daily cash prices

Difference between

cost of gas in storage

and cash prices

Average cash price of

gas during heating

season = $5.49

Source: Platts’ Gas Daily and EIA. Cost of gas in storage is estimated using the volume-weighted average Henry Hub weekly gas prices over the 2003 

injection cycle and does not reflect holding costs.
12

Weather for winter 2003/04 is the key shortterm uncertainty regarding natural gas.

• In an extreme cold-weather scenario, prices are higher and volatile 

– Storage drained with high consumption 

– Heating oil prices remain high, discouraging fuel switching 

– Resulting storage inventory costs lower than wholesale 

prices 

• In an extreme warm-weather scenario, wholesale prices drop but retail prices 

remain relatively higher 

– Late-winter storage withdrawals required for physical 

operations 

– Storage competition with production forces down prices 

– Resulting storage inventory costs raise average retail 

costs through winter 

• Weather is unpredictable 

– For example, Northeast weather intensity (cumulative 

HDDs) over the last decade varied by 40%.
13

Weather for winter 2003/04 is the key shortterm uncertainty regarding natural gas.

Cold winter in the Northeast resulted in large storage draw-down.

Sources: HDD data for NYC LaGuardia from Chicago Mercantile Exchange (www.CME.com). Storage data for Eastern Consuming region from EIA/AGA. 

Notes: Cumulative HDDs measured from Nov-1 through Mar-31. Storage draw-down measured from Nov-1 through Mar-31. Storage draw-down (Bcf)

1,000

1,150

1,300

1,450

1,600

Cumulative heating degree days (HDDs)

3,000 3,350 3,700 4,050 4,400

R2 = 0.929

2001-2

1994-1

1999-2

1997-1

1998-1

1996-1

2000-2

1995-1

2002-2

93% of variation in storage drawdown 
14

In general, winter natural gas system flexibility 

has declined.

• Higher reliance on baseload gas-fired electric generation 

– 56 GW of new combined cycle generation added since 

2002 

– Equivalent of ~4.7 Bcfd (about 5–6% of typical winter peak 

demand) 

• Low levels of demand elasticity 

– Feedstock fuel switching 

• Estimates of fuel switching capability as low as 5–10% 

of total industrial gas demand 

– Electric generation fuel switching 

• Dual-fueled units available in few regions 

• Fuel switching capability estimates as high as 30% of 

total gas-fired power generation, but actual capability 

may be limited by: 

– Access to alternate fuels 

– Warranty restrictions on using alternate fuels in 

newer vintage turbines 

– Environmental restrictions Source: New generation data from EIA. Equivalent gas demand estimate based on 50% capacity factor.
15

• During peak demand, or in cases of equipment failure, transmission congestion 

could occur. 

– Basis differentials increase in the market area during cold 

weather. 

– February Price Spike Study showed that pipeline and 

distribution flow restrictions can increase price levels and 

exacerbate volatility. 

• Winter gas flexibility has improved in some areas in response to market forces. 

– West: 1 Bcf of new capacity from Rocky Mountains into 

central California and southern Nevada (Kern River) 

– Southeast: 1.5 Bcfd of new pipeline capacity into Florida 

(GulfStream and FGT) 

– East: Increased delivery capacity since last winter (Cove 

Point and DistriGas LNG) 

– Midwest: Additional gas deliverability into Wisconsin 

(Horizon and Guardian short-haul systems)

In general, winter natural gas system flexibility 

has declined. (cont’d)
16

Gas value-added for generation versus space 

heating appears greatest in New England and 

California for winter 2003/04. 

Source: Burnham Securities, Inc., “Spark Spread Monitor,” Tables 5 and 6, November 10, 2003.

-$2

$2

$6

$10

$14

$18

$22

Mid-C

NP-15

Palo Verde

SP-15

CinergyComEdEntergy

ERCOT

Mass

PJM

Average

R

e

v

e

n

u

e (lo

s

s) a

fter g

a

s

c

o

sts

(S

p

ark

s

pre

a

d, $/M

W

h)

First quarter 2003

First quarter 2004 (estimated)
17

Survey responses reveal mixed industry reaction 

to Policy Statement.

• Commission’s Policy Statement on price discovery highlighted current problems 

and provided standards to improve accuracy, reliability and transparency of 

indices 

• Staff monitoring plan includes: 

– Survey of industry 

– Individual meetings with price index publishers 

– Meetings with associations 

– Liquidity workshop 

• Slight decline in number of companies reporting transactions; gas lowest 

• Slight decline in number of publishers to whom data is reported 

• Some companies plan to resume reporting late 2003 or early 2004 (e.g.,

Constellation, El Paso Merchant, PG&E, Williams Power) 

• Other companies are waiting for clarification of the Policy Statement or see no 

value in reporting their transactions 

• Presentations at Nov. 4 workshop on liquidity reported more encouraging 

progress
18

Modest growth is evident in new electricity 

futures contract on NYMEX.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Apr-03

May-03

Jun-03

Jul-03

Aug-03

Sep-03

Oct-03

N

u

m

b

er of C

o

ntra

cts

Volume

Open interest

Source: Nymex statistical group and www.nymex.com. Data current through October 2003.

Volume Prices

$0

$10

$20

$30

$40

$50

$60

Nov-03

Dec-03

Jan-04

Feb-04

Mar-04

Apr-04

May-04

Jun-04

Jul-04

Aug-04

Sep-04

Pric

e ($/M

W

h)

Heating season forward curve

(Nov. 11, 2003)

Cooling season forward

curve (Nov. 11, 2003)

PJM monthly electricity 

futures contract
19

Credit remains an ongoing concern related to 

the operations of all energy markets.

• Financial credit ratings and liquidity issues 

– Successful refinancings and debt extension relieved short-term 

concerns (among those that did not file for bankruptcy) 

– Long-term prospects and solvency still under pressure of low 

spark spreads and weak electricity capacity markets 

• Transactional credit issues 

– Studies like the Price Spike Study underscore the effects of credit 

on transaction costs (some market participants had difficulty 

finding creditworthy partners during February price spike) 

– Progress made in credit clearing 

• Nymex 

– Gas: 11.7 quadrillion Btus cleared 

– Electricity: 70 million MWh cleared 

• ICE 

– Gas: 20.6 quadrillion Btus cleared 

• Competitors have had more limited traction 

– Need to monitor margin levels for virtual bids and offers in some 

ISOs
20

Based on this and previous assessments, these 

are some of the factors OMOI will be 

monitoring this winter:

• Natural gas storage 

– Storage status 

– Quality of storage data 

• Spread between spot gas prices and the cost of gas taken out of storage 

• Interaction of electric generation and cold weather 

– Price effects 

– Reliability effects (e.g., pipeline constraints on fuel for 

power generation) 

• Transaction reporting 

– Price and volume reporting 

– Cooperation with FERC’s Policy Statement 

• Creditworthiness issues and implications