CHAPTER 9 GAS TRADING IN 2005 AND THE NAESB CONTRACT
| Jurisdiction | United States |
(May 2005)
GAS TRADING IN 2005 AND THE NAESB CONTRACT
Visiting Assistant Professor
Special Counsel to GEMI
Bauer College of Business
University of Houston
Houston, Texas
Mark E. Haedicke is a Visiting Professor at the Bauer School of Business at the University of Houston (UH), where he teaches energy trading, and energy contracts and consults on energy trading contract disputes. He is Special Counsel at the UH -- Global Energy Management Institute. Mr. Haedicke is also the General Counsel of Rock Energy Partners, LP, an oil and gas development company.
Mr. Haedicke has worked in the energy business for nearly 25 years. He has worked with gas and power distribution companies, gas pipelines, commodity trading and marketing companies and in power plant development. He also was the only non-Wall Street representative on the Board of Directors of the International Swap and Derivatives Association (ISDA) for six years.
Since 1990, Mr. Haedicke has focused on energy trading and marketing. During such time, he has led the development of master contracts for the energy industry. Mr. Haedicke brought financial documentation technology to both physical and financial energy trading contracts. Mr. Haedicke has written numerous articles on energy trading and documentation including: Gas Commodity Markets in Energy Law and Transactions and Competitive-Based Contracts for the New Power Business in the Energy Law Journal. Mr. Haedicke is also the primary contributor to an ISDA white paper: Restoring Confidence in Energy Trading, published in April, 2003 and set forth on the ISDA website, www.isda.org.
Mr. Haedicke received his undergraduate degree in Business Administration from the Honors College at Michigan State University and his law degree from Wayne State University.
Introduction
The last three years have been a time of dramatic change for energy trading in North America. Following the Enron Corp. (Enron) bankruptcy filing on December 2, 2001, there were far-reaching governmental investigations, credit downgrades, indictments, guilty pleas, and more. Well known participants publicly exited the energy trading business, and well known companies saw it as the perfect time to join the business and/or substantially ramp-up their involvement in the business. The last three years have been a time to look at what worked in energy trading and what did not. This paper will focus on the development of the gas markets in North America and the emergence of the increasingly sophisticated gas form contract, the NAESB (as defined below). In addition, this paper will attempt to look forward to future changes in the gas markets and gas trading contracts.
Development of Gas Markets in North America
In the United States, the development of commodity markets for natural gas can be traced back to the Natural Gas Policy Act of 1978 (NGPA). In the 1970s, there had been shortages of natural gas moving in interstate commerce; the NGPA increased wellhead prices and thereby encouraged exploration and brought additional supplies of gas to the marketplace. At this time, most gas was sold under long-term contracts, often for a term of twenty-five (25) years, but this began to change gradually as new supplies came online. Over the course of the 1980s, an active market developed for the buying and selling of physical gas. The spot market was born wherein customers could arrange to buy or sell gas (for physical delivery) for a period of thirty (30) days. The prices of these spot transactions were reported in Inside FERC and other energy industry publications. The gas commodity market was in its infancy or perhaps adolescence. When Congress passed the Natural Gas Wellhead Decontrol Act of 1989, there was no confusion about the direction of the gas markets. The goal was to promote a competitive gas marketplace by removing the remaining first sale ceiling prices.
With price deregulation underway, the Federal Energy Regulatory Commission (FERC) began to tackle the complex infrastructure necessary to transport natural gas in interstate commerce. Deregulating gas prices would be of limited usefulness if it were impossible to transport gas to a point of sale and/or a point of purchase. Otherwise, only the gas that happened to be at the right point of sale or purchase would benefit from price deregulation. All other gas would in effect be held captive to a complex and archaic physical and process infrastructure for the transportation of gas.
In Order No. 436, Regulation of Gas Pipelines after Partial Wellhead Decontrol, the FERC began a process of making gas pipeline capacity available to third party shippers. This was a giant step forward in the development of the gas commodity markets, because now, a buyer or a seller of natural gas could transport the gas on a pipeline that it did not own. Order No. 436 was followed by several orders, including Order No. 636, which required the unbundling of pipeline sales from transportation and the release of capacity on interstate pipelines. These orders made available the infrastructure that was critical for the markets to fully realize the benefits of a competitive marketplace.
For the gas markets, a further critical step was the development of the futures market and the over-the-counter ("OTC") market for the financial trading of gas. Against the backdrop of price deregulation and infrastructure deregulation, the New York Mercantile Exchange ("NYMEX") launched a gas futures contract on April 3, 1990. It was an immediate success and the NYMEX gas contract continues to be a great success today.
The scope and breadth, and most importantly, the liquidity in the gas markets, continued to build throughout the 1990s. It was not until December 2, 2001, that the gas markets, as well as markets for most other energy commodities, were to take a huge blow. On that date, Enron, the largest energy trader in the North American markets, filed for bankruptcy protection. This led to a tsunami of credit downgrades, accounting scandals, falling stock prices and government investigations. Few, if any companies in the energy trading business, have been spared the reputational harm and economic loss. This development, in dramatic fashion, highlighted gaps in the regulatory structure for the gas commodity markets and the need for ever more sophisticated financial and physical gas trading contracts.
At first, the FERC reacted slowly to the events in the marketplace; but over time, it built its knowledge and understanding of both the gas trading markets and the gaps in its regulatory structure. 2 On November 17, 2003, the FERC issued Order No. 644, Amendments to Blanket Certificates, which applies to blanket certificate holders, i.e., those companies buying and selling natural gas in interstate commerce. The order's purpose was to insure the integrity of the gas sales markets under the FERC's jurisdiction. The order sets forth a new code of conduct in Section 284.288 of the FERC's regulations. Therein, blanket certificate holders are prohibited from "engaging in actions or transactions that are without a legitimate purpose and that are intended to or foreseeably could manipulate market prices, market conditions, or market rules for natural gas". Prohibited actions and transactions include wash trades, collusion, and submitting false or misleading price information to any publisher. Blanket certificate holders must keep price data for 3 years. The remedies for violation of the regulations include disgorgement of unjust profits and revocation of a blanket certificate. Based on this order, the gas markets had evolved again. There is...
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