On January 26, 2012, FERC released its first audit reports for Form No. 552 compliance.  Form No. 552 is a reporting mechanism for natural gas market participants (see June 18, 2010 edition of the WER) that requires the reporting of physical natural gas transactions that either (a) use an index price, (b) contribute to an index price, or (c) could contribute to an index price.  The first audits issued were for Form No. 552 reports that Merrill Lunch Commodities, Inc. (“Merrill Lynch”), Shell Energy North America (US), L.P. (“Shell”), Total Gas & Power North America, Inc. (“Total Gas”), and Petrohawk Energy Corporation (“Petrohawk”) submitted, each for the period January 1, 2009 through December 31, 2010. 

The recently issued audit reports highlight the types of information FERC audit staff is reviewing, as well as the types of Form No. 552 errors and corrective actions that have been identified so far.

In its audit reports of Form No. 552, FERC’s Division of Audits within the Office of Enforcement (“OE”) identified the methodology its auditors used in reviewing companies’ Form No. 552 filings.  Among the items that OE auditors reviewed included:

• Reporting of Affiliates: Audit staff reviewed corporate organizational charts and held discussions with employees to identify all affiliates that purchased or sold physical natural gas subject to the reporting requirements of Form No. 552.
• Reporting to Price Index Publishers: Audit staff requested supporting documentation and held discussions with employees to determine whether transaction information was reported to Price Index Publishers.
• Total Transaction Volumes: Audit staff reviewed total reportable physical natural gas purchases and sales volumes to verify the accuracy and completeness of the Form No. 552. 
• Classification of Transaction Volumes: Audit staff evaluated the physical natural gas purchases and sales volumes reported in the form to verify the accuracy of each transaction category. 
• Reportable and Nonreportable Transactions: Audit staff analyzed physical natural gas transactions to ensure all of them were reported in the Form No. 552.

As a result of the audit process, OE auditors identified errors submitted on some Form No. 552 reports, and recommended compliance activities going forward.  While Merrill Lynch and Shell’s Form No. 552 submissions had no errors that required corrections, for others, the audit reports recommended corrections and changes going forward.  For the most part, the recommended actions would correct only accounting errors and internal procedures rather than providing insight on terms used on Form No. 552.  The recommended changes included:

• Updating a company’s procedures used in preparing Form No. 552 to ensure it accurately reports physical natural gas transactions volumes.
• Updating a company’s procedures to ensure that all affiliates with reportable volumes of physical natural gas are identified on the Form No. 552.
• Adopting reporting procedures to exclude sales volumes associated with unprocessed gas, natural gas liquids, and oil.
• Training employees on the Form No. 552 instructions to ensure they can distinguish reportable from non-reportable transactions.
• Revising any previously filed Form No. 552 to reflect corrected volumes for each category, total purchases sales, and recommendations issued.

OE directed Petrohawk and Total Gas to revise and re-file with the Commission the corrected From No. 552 within 30 days after the issuance of the audit report.  In addition, OE directed these companies to submit (1) plans for implementing the recommendations identified in the final audit report, and (2) copies of any written policies and procedures developed in response to the recommendations.

Copies of the audit reports can be found here.