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Gas Prices Become Political Hot Potato in DC

Gas Prices Become Political Hot Potato in DC

Recognizing that energy consumers are likely to experience price shocks for natural gas, electricity and heating oil this winter, Senate and House lawmakers last week began calling on Congress and the Clinton administration to work cooperatively to open up more public lands to exploration and drilling, provide tax incentives for producers (especially marginal well operators) and to consider options that would make a broader mix of fuels (other than natural gas) attractive to the electric generation market.

Much of the rhetoric had the look and feel of last minute electioneering. Congress only has about a week left before it adjourns for the year, so the odds of any real action are slim. Still, the Senate GOP thinks the time may be right to try to push through a package of energy initiatives, sponsored by Sen. Frank Murkowski (R-AK). Even if Capitol Hill were to act, the effect of its measures wouldn't be felt in time for this winter. It does provide some indication, however, of directions a new Congress might take, particularly if the dire warnings come true by the time it convenes in mid-January.

Offering lawmakers some real-world advice, FERC Chairman James J. Hoecker proposed several measures to "ameliorate" the effects of natural gas price volatility this winter. He called on LDCs to accent hedging techniques and long-term contracts, on state regulators to make greater use of rate design and stabilization tools and to closely oversee LDC purchasing practices, and on federal and state governments to support energy assistance and weatherization programs to aid low-income customers.

He cited some long-term solutions as well, such as a gas pipeline from Alaska and energy efficiency measures, but these aren't going to "heat people's houses and.....cook their food" this winter, Hoecker told the House Energy and Power Subcommittee during a hearing last Thursday.

"The prospect of higher prices this winter for natural gas is a matter of serious concern for businesses and consumers. I do not minimize the consequences for our citizens of today's price and deliverability issues, especially if our winter weather is extreme," he said. However, he cautioned that regulatory and policy responses to the situation should be "measured and balanced in recognition of the fact that the fundamental structure of interstate natural gas markets is sound."

Within the boundaries of its jurisdiction, "the Commission is working hard to ensure that there is adequate pipeline infrastructure available at fair prices," Hoecker said, adding that FERC has authorized 6,000 miles of new pipeline facilities over the past three years.

Congressional policies have created a "transportation platform for [a] well-functioning commodity market." This has resulted in "significant benefits" for gas consumers over the past years, some of which "have come at the cost of [a] downturn in drilling." The fact that gas producers already have stepped up exploration and drilling efforts in response to higher gas prices "is evidence of a functioning market," Hoecker assured lawmakers.

But Chairman Murkowski of the Senate Energy and Natural Resources Committee didn't see gas as a well-functioning market, especially as consumers face the prospect of 50% higher bills this winter. The "pressure's going to be on natural gas [this winter].....That's where the next train wreck is coming," he said during a committee oversight hearing on the winter fuel outlook last Tuesday.

"We're already too late" to be much help to gas consumers this winter, Murkowski said. He estimated about 50% of the households in the United States use gas as a home-heating fuel, and about 14% of utilities depend on gas to generate electricity. This stepped-up demand is squeezing supply. "We're using now for the first time our gas reserves faster than we're finding new reserves."

Alluding to President Clinton's release of crude oil from the Strategic Petroleum Reserve (SPR) to mitigate heating oil prices this winter, Murkowski asked Energy Secretary Bill Richardson whether the administration had anything up its sleeve to rein in natural gas prices as the industry enters the winter heating season. "There's no SPR for natural gas," he reminded Richardson.

Sen. Pete Domenici (R-NM) predicted the "next crisis for America unequivocally will be [that] we don't have enough natural gas," and it will likely occur this year - if it hasn't begun already. The gas industry has assured consumers, however, that supply will be sufficient to meet demand this winter. Domenici warned gas consumers to "hold onto your pocketbooks because [you] ain't seen nothing yet" with respect to gas prices, which he believes will go "through the roof."

He blamed Department of Interior (DOI) policies that restrict exploration and drilling on public lands, and Environmental Protection Agency (EPA) rules and regulations that favor gas over coal in electric generation for contributing to the supply imbalance affecting natural gas.

Contrary to popular belief, the "energy policy of the United States is made by [the] Interior Department" rather than the Department of Energy (DOE) "because they determine what lands can be entered for drilling for oil and gas," Domenici said. The EPA also is "greatly involved" in the development of energy policy.

Currently, there are no Interior policies that are "pro-development" of oil and gas, Domenici said, adding that 60% more federal lands are off-limits to producers today compared to 1983. Also, EPA emissions rules have made it nearly impossible to construct generation facilities that aren't fueled by natural gas, he noted, adding that it's been 10-20 years since a new coal-fired facility was built.

So "we are hell-bent to use natural gas.....We're limiting America to that kind of energy [gas]" rather than a broad-based mix of sources, Domenici noted. He and other lawmakers believe that restricting much of the electric generation market to a single fuel (gas) is a dangerous policy, and that action should be taken to reverse this trend.

Texas Railroad Commissioner Charles R. Matthews warned against over-reaction. "I do not believe we should change the demand side of the equation with price controls or other governmental intervention." Instead, "we need to make changes to [the] supply side" by formulating polices that favor tax incentives for producers, reopening training programs for oilfield workers and developing new recovery technologies. "We [in Texas] have a record of proving.....that tax incentives do work."

But Byron Lee Harris, deputy director of the West Virginia Consumer Advocate Division of the Public Service Commission, supports rate controls. "As the result of the rate caps that we have in place, approximately 85% of natural gas customers [in West Virginia] will not experience an increase in their rates this winter, which has been estimated to be an $82 million savings."

But given the high level of natural gas prices now, he advised other state regulators not to pursue "absolute" rate freezes as a way to protect consumers this winter. As an alternative, "commissions could opt for [a] modified cap that protects [customers] against price increases, but is flexible enough to capture potential price declines."

There was a lot of finger-pointing during the Senate and House hearings as to who was at fault for the "energy supply train wreck.....on the horizon," as Murkowski called it. He accused the Clinton administration of being "asleep" at the wheel. The fact the administration had to tap the SPR this early "clearly" sends the message to the U.S. public that "we're in trouble. We're now having to go into our savings accounts."

Specifically, Senate and House Republicans rapped administration policies that ban or severely restrict drilling on public lands, and favor strict emissions rules that are making certain fuels (other than natural gas) prohibitively expensive to use in the electric generation market. The also cited the administration's failure to develop a national energy policy.

Democrat lawmakers, as well as Richardson, countered with their own laundry list of energy shortcomings of the congressional Republican majority. Topping the list was the failure to pass electricity restructuring legislation and the administration's package of tax incentives for marginal oil and gas production/renewable energy sources, and reauthorization of the SPR.

Sen. Tim Johnson (D-SD) summed it up: "I, for one, don't believe either political party has particularly distinguished itself on energy strategy for a long, long time."

Susan Parker

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