There’s no question that natural gas prices will be higher this winter due to post-hurricane supply curtailments in the Gulf of Mexico. But FERC and the Commodity Futures Trading Commission (CFTC) “are committed to ensuring that prices don’t go higher still because of manipulation,” FERC Chairman Joseph Kelliher said last Wednesday as the two agencies signed a memorandum of understanding (MOU) pledging to work together to limit abuses in the gas market.

The MOU, which calls for FERC and the CFTC to share information, “ensures the orderly manipulative-free behavior of the natural gas markets,” said CFTC Chairman Reuben Jeffery III.

It’s a “pretty important agreement” because it will allow FERC to “more readily identify” manipulative activities in the gas market, Kelliher noted. The agreement does not give either agency additional authority. Rather it formalizes the relationship that previously existed between the two and allows for a “smoother process” when sharing information.

Kelliher and Jeffery signed the MOU just prior to the start of the fourth annual “State of the Natural Gas Infrastructure Conference” that examined the impact of Hurricanes Katrina and Rita on upcoming winter natural gas supply and prices. The omnibus energy bill, which was enacted into law in early August, required the two agencies to sign the agreement within six months of the bill becoming law.

“We are mindful that the tight natural gas supplies could create temptations for improper behavior by some market participants [this winter]. The Commission will monitor, and if necessary, investigate and penalize any evidence of market manipulation,” Kelliher said at the conference. He noted that the energy bill gave FERC new authority to issue rules to prevent manipulation of gas markets and assure price transparency. “We will act swiftly to place regulations [into] effect in these areas.”

Enforcement “is going to become a more important part of Commission business,” Kelliher said, although he declined to respond to reports that FERC plans to restructure its chief enforcement division, the Office of Market Oversight and Investigations (OMOI). “You’ll know when and if there is an announcement” on this matter, he told reporters.

Steve Harvey of FERC’s OMOI cautioned that FERC would have to be careful this year in identifying manipulative behavior, given that the gas market — having been rocked by back-to-back hurricanes — is acting abnormally. “We haven’t been in this circumstance before,” so regulators will have to be “very careful when thinking about manipulation,” he said. In short, what may have been manipulative behavior last winter may not necessarily be so this winter. Asked if this meant the Commission hasn’t observed any manipulation so far, Harvey said he wasn’t prepared to go that far.

“We’re going to be on top of this all winter,” vowed FERC Commissioner Nora Brownell.

“Consumers will see higher natural gas prices this winter. The only questions are how much higher, and whether such price increases reflect only the operation of supply and demand. Additionally, consumers will be paying higher prices for electricity that is generated with natural gas,” Kelliher said.

The full extent of the impact of the twin hurricanes that struck the Gulf Coast still is not known, with some damage assessments still in the beginning phases. Brownell, who met with industry leaders in Houston last Tuesday, said the executives told her that it may be “months and months and months” before complete damage assessments are known.

“It has been reported that 26 gas processing facilities have been shut down because of the hurricanes. There are still 20 out of service — 11 have sustained damage, some severe and nine more remain offline because of external factors — thus creating a long-term bottleneck between some production wells and the interstate pipelines,” Kelliher noted. The Department of Energy’s tally of the number of gas processing plants in Louisiana that remain offline is more modest — 15 facilities.

Although restricted by what it can do under the Natural Gas Act, Kelliher said the Commission “stands ready to act quickly on emergency filings to authorize efficient use of existing gas infrastructure” in the Gulf. Last Tuesday, he noted that “Discovery Gas Transmission filed a request for an emergency exemption to transport gas around the [damaged] Venice plant for processing at Discovery’s non-jurisdictional Larose, LA, processing plant. We approved this request by the end of the day.”

The pipeline infrastructure in the Gulf fared considerably better than the onshore processing facilities, according to Kelliher. “All but a few of the interstate natural gas transmission lines onshore in the Gulf region appear to be in sound shape. Storage injections continue, and nationally storage levels are slightly above the average of the past five years for this date.”

Moreover, “all five [liquefied natural gas] terminals in the Lower 48 states are fully operational, sending up to 4.2 Bcf/d into the markets in the Gulf and the East Coast,” according to the chairman. He reported that while the Trunkline LNG terminal in Lake Charles, LA, took a direct hit from Hurricane Rita, “the high safety standards to which it was built…allowed it to withstand the winds, rain and storm surges, and get back into operation on Oct. 3.”

A report released last Wednesday, entitled “Summer 2005 Energy Price Review” by FERC staff, showed natural gas prices have been driven to new heights by supply-side factors including continuation of the overall decline in lower 48 natural gas production, aggravated by hurricane losses and a drop in LNG imports, combined with demand boosted by an abnormally hot summer.

It all added up: a 1% decrease in domestic gas production from the summer of 2003 through the summer of 2005, despite a 30% increase in drilling; a 13% decrease in LNG imports from April through September 2005 compared to the same period in 2004; a 26% increase in cooling degree days, June through August, this year over last; and capping it off, the twin hurricanes. The highest daily price, $15.22/MMBtu, came in September after Rita struck.

The report found price increases were not uniform across the country, but were lower in the West due to cooler temperatures and improved pipeline access to Rockies supplies.

Also, “Florida prices rose to the highest levels in the nation, reflecting delivery infrastructure disruptions due to the hurricanes themselves.” Looking at forward markets, the FERC report saw the likelihood of increasing price differences between producing regions and the Northeast, “suggesting that market participants are concerned about the adequacy of transportation infrastructure to that region for the winter.”

And it’s not over yet. “Hurricanes Katrina and Rita will have a lasting effect on natural gas prices.” And those inflated prices will continue to spill over into the power sector. A key factor in restoring natural gas supplies and taking the pressure off of prices is the 15 processing plants with a capacity of 10.1 Bcf/d that still are offline along the Gulf Coast.

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