Office of Market Oversight and Investigations 1

Staff Report by the:

Office of Market Oversight and Investigations (OMOI)

2003 Summer Energy Market Assessment

Federal Energy Regulatory Commission
Office of Market Oversight and Investigations 2

As we head into the heat of summer 2003

ß Market participants have taken steps toward transparent market designs 

and trading platforms, as open and competitive energy markets evolve. 

ß New power plant investments now provide higher reserve margins 

across much of the country.

ß Market participants are addressing concerns about the quality of natural 

gas price reporting. 

ß Energy markets are rebounding from a period characterized by adverse 

financial conditions.
Office of Market Oversight and Investigations 3

Nonetheless, there are challenges for

energy markets this summer

ß A tight supply-demand balance in natural gas markets is raising natural 

gas and electricity prices.

ß Demand response, an effective tool for dampening price spikes, is 

missing from electricity markets.

ß Financial conditions have reduced the number of companies active in 

energy markets, consequently limiting market liquidity and 

effectiveness.
Office of Market Oversight and Investigations 4

Futures market participants expect natural gas 

prices to remain above those of 1990s

Source: Historical data are Nymex settlement prices from GASdat. Futures prices are Nymex settlement prices on May 29, 2003.
Office of Market Oversight and Investigations 5

Natural gas-fired generation frequently sets

the regional wholesale electric price

Note: Percent of time natural gas or oil is projected to be on the margin in 2003.

Source: Cambridge Energy Research Associates (CERA), April 30, 2003.

.
Office of Market Oversight and Investigations 6

Throughout the country, natural gas 

prices have doubled since last summer

Note: Prices shown are the monthly 

average actual mid-point prices. 

June 2003 numbers include data 

through June 18 only. Price points 

selected are representative points for 

the regions of the United States 

analyzed in the 2003 Summer Energy 

Market Assessment. Source: Gas 

Daily.

$0

$1

$2

$3

$4

$5

$6

$7

Tenn., Zone 6 delivered

Transco, Zone 6 N.Y.

Transco, Zone 6 non-N.Y.

Henry Hub

Transco, Zone 4

Florida city-gates

Columbia Gas, App.

Chicago city-gate

Northern, demarc.

Panhandle, Tx.-Okla.

Houston Ship Channel

El Paso, San Juan

Northwest (Sumas)

PG&E city-gate

SoCal Gas

Price ($/MMBtu)

June 2002

June 2003
Office of Market Oversight and Investigations 7

Depending on the role of natural gas in the region, 

some regions’ electricity prices have increased

$0

$10

$20

$30

$40

$50

$60

$70

NEPOOL/Mass Hub

New York, Zone GNew York, Zone J

PJM West

Entergy

Southern

Florida

Cinergy

ComEd

MAPP North

SPP

ERCOT

Palo Verde

Mid-Columbia

NP15SP15

Price ($/MWh)

June 2002

June 2003

Note: Prices shown are the average 

actual on-peak day-ahead loadweighted prices. June 2003 numbers 

include data through June 18 only. 

Price points selected are 

representative points for the regions 

of the United States analyzed in the 

2003 Summer Energy Market 

Assessment. Source: Megawatt 

Daily.
Office of Market Oversight and Investigations 8

To address high natural gas prices

market participants are taking action

Commission Actions

ß Expediting new certificates for pipeline 

capacity, including out of the Rockies

ß Enhanced Certificate Streamlining 

Initiative 

ß Revised LNG terminal policy

ß Regional Infrastructure Conferences

Industry Actions

ß More drilling is occurring in response to prices.

ß Industry is seeking access to new supply 

sources.

ß Competitive pressures could displace some 

inefficient natural gas-fired generators with 

new, efficient natural gas-fired units.
Office of Market Oversight and Investigations 9

Small reductions in demand can lower spot market

electricity prices significantly for all customers

Source: Confidential bid data and illustrative demand curves.
Office of Market Oversight and Investigations 10

Demand response has many benefits for customers

Demand response in electricity markets:

• reduces peak prices

• moderates price volatility

• reduces peak loads, reduces congestion and improves local 

reliability

• reduces supplier market power

• moderates long-term price levels by lowering spot market prices
Office of Market Oversight and Investigations 11

Demand response will play a limited role this summer

ß Demand response participation identified in organized electricity 

markets was low in 2002.

- 0% in CAISO

- 0% in ISO-NE

- 3% in NYISO

- 3% in PJM

ß Outside organized markets, reliable demand response data are not

available.
Office of Market Oversight and Investigations 12

To address the lack of demand response

market participants are taking action

Industry Actions

ß Some regions are promoting demand 

response aggressively to help meet reliability 

needs this summer, such as in New York and 

Connecticut.

ß ISO-NE revised its tariff to provide more 

price certainty to customers.

ß NYISO has tied activation of demand 

response to prices in the spot market.

ß States are working to implement new demand 

response tariffs or improve existing ones, 

such as in California and Florida. 

Commission Actions

ß FERC has proposed market design rules 

that allow demand resources to participate 

on an equal footing with supply resources in 

wholesale markets.

ß FERC requires market monitors to report on 

demand response in annual reports and 

monitors electric markets to ensure that 

demand resources are treated fairly.

ß FERC has approved revisions to demand 

response tariffs in ISO-NE, NYISO and 

PJM.

ß FERC is creating standard interconnection 

rules for small generation.

ß Along with DOE, the Commission is 

conducting analysis of distributed 

generation and its effect on electricity 

market prices and reliability.
Office of Market Oversight and Investigations 13

Financial conditions have dampened 

energy market liquidity 

ß Current financial conditions have forced market participants to exit 

trading, reducing the liquidity of physical and financial energy

markets and, consequently, their effectiveness. 

ß Longer-term implications of the lack of liquidity include reductions 

in available capital for infrastructure investments and storage 

injection.

ß Current financial conditions highlight the need to ensure that the 

conditions of nonregulated affiliates do not harm regulated utility 

customers.
Office of Market Oversight and Investigations 14

To address financial conditions, market

participants are taking action

Commission Actions

• Enhanced oversight of corporate financial 

management to protect regulated 

customers. For example, review of 

Section 203 and 204 policies and adoption 

of an interim rule for “Regulation of Cash 

Management Practices”

• Proposed additional quarterly financial 

reporting

• Continued oversight of credit standards for 

pipelines and electric transmission owners

• Work to implement the wholesale market 

platform

• Continuing work to bring closure to 

western market issues, providing 

regulatory certainty to market participants

Industry Actions

• Restructuring to improve financial conditions 

and remain competitive in the longer-term

• Using innovative techniques to increase 

effectiveness, such as credit clearing
Office of Market Oversight and Investigations 15

Further information on OMOI’s 

2003 Summer Energy Market Assessment

ß This presentation will be available following the meeting on 

www.ferc.gov.

ß The complete 2003 Summer Energy Market Assessment, including 

Regional Assessments, will be available in the next several weeks 

from www.ferc.gov.

ß Please contact Lisa Carter (Lisa.Carter@ferc.gov) or Jolanka Fisher 

(Jolanka.Fisher@ferc.gov) with any questions.