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. Other federal agencies have roles affecting the electricity and natural gas  markets. 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. 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. FERC has also taken steps to improve its ability to monitor price indices  and enforce related market rules. 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. The Energy Policy Act also  gives FERC authority to collect transaction information if necessary to  ensure price transparency. 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. 1.) 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. 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. Despite their general satisfaction with most price indices, some  stakeholders reported concerns about price indices for long-term  electricity markets. 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. 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. 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.
Why GAO Did This Study

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?

What GAO Found

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.