1. Presented to: Gas Storage Conference Ziff Energy Group Houston, TX February 2, 2005 Natural Gas Storage Market Issues: A Federal Perspective William F. Hederman, Director Office of Market Oversight and Investigations Federal Energy Regulatory Commission WH/GG/BF/TP-2/2/05

2. 2 Outline Introduction Storage Overview LNG Recent FERC Issues Conclusion (Opinions expressed are personal Hederman opinions, not those of the Federal Energy Regulatory Commission or the U.S. government..)

3. 3 FERC has 3-prong strategy. Effective Rules Infrastructure Rules Enforcement Competitive Markets Just & Reasonable Outcomes Strategic Approach Intro

4. 4 Storage is a key market component. Enhance efficiency Provide reliability Provide “hedge” Responding to many market changes --production --power generation --others Intro

5. 5 U.S. Storage by Region Source: Platt’s PowerMap Storage Field Type Aquifer Storage Depleted Gas Reservoir Salt Cavern LNG Import Terminal 85% 9% 4% 2% Overview 5

6. 6 Volumes of Underground Storage Total gas storage capacity relatively unchanged over past 6 years – 8.1-8.3 Tcf Base, or cushion, gas = approx. 50% (EIA) However, theoretical limits not tested. FERC staff estimates total practical storage operating capacity = 7.6 Tcf. Of that, 3.5 Tcf is working gas; 4.1 Tcf is base gas. With reengineering, FERC estimates total working gas could be 3.6-3.8 Tcf Source: U.S. Department of Energy, Office of Fossil Energy Overview

7. 7 Cushion Gas Working Gas Storage capacity has not changed very much. Overview Storage Capacity – Working/Cushion

8. 8 Stocks were 279 Bcf above the 5-year average of 2,419 Bcf. Total U.S. Working Gas in Storage to Date Note: 5-year range includes data from April 1999–March 2004. Ranges are minimum and maximum weekly volumes over 5-year period. Sources: OMOI analysis; derived from EIA Historical Weekly Storage Estimates Database, Weekly Natural Gas Storage Report data through the week ending. Volume (BCF) Natural Gas Storage

9. 9 Producing West Consuming East Consuming Stocks were 124 Bcf above the 5-year average of 678 Bcf. Stocks were 111 Bcf above the 5- year average of 1,425 Bcf. Stocks were 44 Bcf above the 5-year average of 316 Bcf. Relative Regional Storage Stocks* * 5-year average storage stocks at the first week of the heating season for each region. Note: These graphs are on different scales. 5-year range includes data from April 1999–March 2004. Ranges are minimum and maximum weekly volumes over 5- year period. Sources: OMOI analysis; derived from EIA Historical Weekly Storage Estimates Database, Weekly Natural Gas Storage Report. Data through the week ending.. Volume (BCF) Total Working Gas in Storage to Date - Regional Natural Gas Storage

10. 10 Liquefied Natural Gas (LNG) is an important factor for storage market. June EIA report: 113 active LNG facilities in U.S., including: –5 marine terminals (4 import, 1 export); –Storage facilities; and, –Operations facilities in niche markets such as LNG vehicle fuel. Most LNG storage facilities operate only to provide peak- day supply (90 are dedicated solely to meeting storage needs of LDCs). LNG

11. 11 LNG developments are already important. Despite low LNG storage capacity to total volume: –Provides equivalent of 13% of underground storage deliverability, or about 11 Bcfd. –In East, LNG = 23% of underground storage deliverability on peak day. –In New England, LNG storage deliverability = 3.4 Bcfd. This does not include deliverability from Tractebel’s Distrigas marine terminal near Boston. –In the West, LNG storage deliverability = 1.2 Bcfd or 10% of underground storage deliverability. LNG

12. 12 Gas Storage LNG Expansion Plans Underground conventional storage: –New capacity relatively static; and, –There are efforts to update technology and operations of existing sites to increase injection and withdrawal. LNG – A score or more of applications: –US –Canada –Mexico –Bahamas –Offshore in Gulf of Mexico, New York, and New England.

13. 13 Recent Issues Improper reporting by companies of storage data. On Aug. 2, FERC required 3 companies to pay total of more than $8 million in civil penalties and customer refunds for providing preferential access to market-sensitive storage data. One potential remedy: Required daily posting of storage data by companies. September Tech Conference: little support for daily posting. Since EIA pre-Thanksgiving problem, opinions are shifting.

14. 14 Public Facts: Pre-Thanksgiving Storage Data Problem November 19, 2004 -End of week for which storage data being reported. November 22, 2004 -DTI clerk transmits wrong file to EIA; correct file posted on DTI website. November 24, 2004 -Market analysts predict net draw downs of 13-25 Bcf for subject week. Noon: EIA posts storage figure with incorrect DTI data (reporting 49 Bcf net withdrawal), immediately receives inquiries about accuracy. “Noonish” OMOI organizes an inquiry. 12:30 (approximately): EIA contacts DTI clerk who resubmits form with correct data (without informing DTI management). November 29, 2004 -DTI manager tells trade press, in response to inquiry, that DTI submitted correct data. November 30, 2004 -In preparing response to FERC/OMOI inquiry, DTI management discovers what had happened. December 1, 2004 -DTI informs OMOI of its findings. December 2, 2004 -EIA, following official policy, incorporate correction in regular weekly report.

15. 15 Conclusion Commodity markets pay more attention to storage data than may be rational, probably because they are the only relevant periodic data on S/D balance. The market is in the process of sorting out storage needs and value as the supply and demand situations change significantly and relatively quickly. LNG could relieve storage needs at the end of the pipelines (e.g., New England, New York, California), but the only communities actively working effectively to put LNG are along the Gulf of Mexico. FERC/OMOI is carefully monitoring storage reporting developments, to the maximum extent possible without impinging on EIA.

16. 16 Market Integrity is Everyone’s Business FERC Hotline: 1-888-889-8030