Consumer Advocacy Report Prioritizes Natural Gas Policy Actions
With average winter heating bills for the natural gas household expected to top $1,000 for the first time in U.S. history this winter, there is an extreme urgency for Congress to make the right public policy choices, according to a new report by the Consumer Federation of America (CFA), a consumer advocacy and research group that represents about 300 nonprofit organizations.
"The 60 million households that heat with natural gas will spend an average of almost $1,400 for natural gas this winter," said Mark Cooper, CFA's director of research and the author of the report, "and for low income households the natural gas heating bills will eat up 10% of their income. Policymakers can no longer ignore the urgent need to adopt a comprehensive natural gas policy."
Cooper noted that gas prices have doubled in the last five years and gas markets have "moved into a permanent state of turmoil, with wild spikes around an upward spiral. A hint of bad news sends prices skyrocketing, but good news does little to reduce the pressure," he said.
CFA acknowledges that there are a broad range of potential policy actions, and therefore, it provides a ranking of policy choices based on their impact and their cost. The analysis is made in at report titled, "Responding to Turmoil in Natural Gas Markets: The Consumer Case for Aggressive Policies to Balance Supply and Demand."
"The key to vigorous policy action is to acknowledge the need to reduce pressures on the market and build a consensus around the direction of policy action," Cooper said. "A balanced solution must include policies that address short, mid and long-term needs and affect both the structure of the market as well as the conduct of market participants."
The report concludes that a business-as-usual approach to natural gas markets will not work because it will lead to a huge shortfall over the next two decades that would cause price increases and place a severe burden on household budgets and industries that rely heavily on natural gas.
Not everyone agrees on the current level of supply scarcity that has contributed to the sudden increase in gas prices, the report notes. In fact, even the Energy Information Administration and the National Petroleum Council disagree on gas supply availability and reserves. Alternative views to the gas scarcity question point toward manipulation and abusive market practices as the primary contributors to high prices, CFA said.
"CFA's view is that scarcity and strategic behavior have interacted. We cite the maturity of the domestic resource base as the reason public policy should not overemphasize domestic drilling as a solution. We recognize that this has implications for scarcity and we accept the need to expand supply in an environmentally sound way.
"However, we believe that strategic behavior played a role as well. Inadequate competition [following Enron's downfall and the collapse of gas trading] has augmented volatility and accelerated the upward price spiral," Cooper said in the report. "The implications of this discussion is that we should put some eggs in the scarcity basket and some eggs in the strategic basket."
However, the first thing CFA believes should be done is to ensure that manipulation, or "strategic behavior," is "not the underlying problem" in the gas market today.
"We believe that strong measures to ensure confidence in markets are critical to establish the credibility of arguments for other policies."
Policies to ensure transparency of market supply and prevent manipulation of prices have to come first on the list of policy choices, Cooper said. "The Federal Energy Regulatory Commission has yet to implement procedures to accomplish this. Reporting of transactions is still spotty." He did not elaborate on this point and in the report did not discuss the steps that already have been taken in this area by the Commission, the gas industry and index publishers.
In a phone interview with NGI, Cooper said he believes that FERC needs to mandate price reporting and collect the data itself, publishing its own indexes. He said because the price reporting system is still voluntary companies can still manipulate the market simply by selectively reporting their correct transactions to publishers. No one should be doing the job of price reporting except the Federal Energy Regulatory Commission itself, he said.
Another CFA policy recommendation -- which FERC currently is investigating -- is to promote more natural gas storage. However, CFA favors the controversial idea of creating a "public gas stockpile," or strategic gas reserve, saying, "Public utility commissions have investigated and could order utilities to have [a] stockpile on hand as the peak season approaches."
Increasing energy efficiency is the next step on CFA's list. CFA said there is the potential for a 25% demand reduction through efficiency measures, including actions dealing with building codes, appliance standards and industrial use -- "that essentially accelerate the adoption of currently available best practices or readily achievable savings with off-the-shelf technologies... The key challenge is to move higher efficiency products and practices into widespread use. Standards, incentives and education programs are the vehicles to do so." CFA said these actions do not include the impact of a renewable portfolio standard.
CFA also recommends relaxing environmental restrictions on fuel switching to allow construction of more dual-fuel capability for heating, promoting coal gasification, the construction of the Alaska natural gas pipeline and expansion of liquefied natural gas imports. However the latter three policy choices would have little or no short-term impact.
"Drilling in sensitive environmental wilderness and offshore areas ranks lowest in priority because it can, at best, be considered to address the mid-term transition to other sources and may have potentially large environmental costs," CFA said.
"The energy policy season has started early this year, with think tanks and senators calling for action, but if they do not recognize that this is a pocketbook issue and balance the needs of consumers and producers, they will never build the base of popular support needed to move ahead," Cooper concluded.
Earlier this month, Senate Energy and Natural Resources Chairman Pete Domenici (R-NM) said he is proposing to put solutions "to the looming crisis in natural gas supply and demand" on the front burner of the new Congress, calling for legislative proposals to be filed with the committee by Jan. 7. The senator's announcement followed on a number of complaints earlier this month over the rising price and volatility of natural gas. Domenici issued a broad call for legislative proposals that offer long-term solutions. The proposals will be reviewed by committee staff and a half-day meeting has tentatively been scheduled for Jan. 19 to hear about those that appear most promising (see NGI, Dec. 13).
For a copy of the report go to CFA's website at http://www.consumerfed.org/backpage/gas.cfm.