Still operating under outdated laws and technology, the Federal Energy Regulatory Commission, the Commodity Futures Trading Commission (CFTC) and the Energy Information Administration (EIA) are severely hamstrung in their abilities to determine whether natural gas prices are responding to competitive supply and demand factors or manipulative forces in the market, according to another government agency.

“FERC…lacks an adequate regulatory and oversight approach to meet this role. [It] is still using legal authorities to regulate an evolving, competitive market that were enacted when the wholesale natural gas supply market was regulated,” the General Accounting Office (GAO) said in a report, “Natural Gas: Analysis of Changes in Market Price,” released Thursday.

The Commission’s “market oversight initiatives have been ineffective, serving more to educate staff about new markets than to produce effective oversight” of the activities of gas companies, the GAO report noted. As a result, FERC, which regulates the interstate transportation of gas, “has been slow to react to charges of possible market manipulation and lacks assurances that wholesale natural gas prices are just and reasonable.”

The GAO said FERC has acknowledged its shortcomings, and has taken steps in recent months to beef up its monitoring of both the electricity and gas markets in the nation. Further, the agency recommended that Congress consider enhancing the Commission’s authorities “in light of the changing energy markets,” particularly those powers related to its new Office of Market Oversight and Investigations.

At the urging of congressional lawmakers, the GAO undertook the study to learn more about the factors influencing gas price volatility and, in particular, the high prices that occurred in the winter of 2000-2001; the federal government’s role in maintaining and ensuring that gas prices are a response to a competitive market; and the options available to gas utility companies to mitigate the effects of price spikes.

The CFTC, the agency overseeing the commodity futures markets, has its shortcomings as well, the GAO noted. It “does not have general regulatory authority over trading in the [over-the-counter] derivatives markets.” But it does possess “anti-manipulation authority and is currently investigating what role, if any, that these markets may have played in the natural gas price spike of 2000-2001,” the agency said, adding that the CFTC investigation “could lead to enforcement actions or highlight the need for legislative changes.”

The EIA, the arm of the Department of Energy that supplies statistical energy information, “has an outdated natural gas data collection program,” according to the report. “Most elements of EIA’s current natural gas collection program have been in place for more than 20 years, when the more regulated natural gas market was much less competitive and complicated.”

The end result is that EIA’s ability to “provide information that promotes understanding of the market price of natural gas has declined significantly,” the GAO said. The EIA recognizes the need for it to collect “more accurate and timely data” on the gas market, and is taking steps to improve its collection activities, the report noted.

It concludes that gas prices are “inherently susceptible to volatility,” blaming in part the length of time it takes for producers to respond to price signals by drilling and bringing on line new supplies. While natural gas prices overall have declined since wellhead prices were decontrolled, they have become much more volatile.

GAO pointed to a period in 1996 when prices increased 286% and then decreased 71% in a four day span. And “in 2000-2001 for example, natural gas supplies, constrained by unusually low storage levels and the inability to quickly increase production levels, combined with skyrocketing demand associated with extremely cold weather and strong economic growth to create the perfect environment for the price spike that occurred.” GAO also notes there is some evidence prices may have been manipulated.

But it noted that gas utility companies can take various steps to protect their residential customers against price spikes. “For example, through storage, fixed-price buying arrangements, and derivatives, utilities can hedge against the risk of price spikes by locking in prices for future gas prices.” Since the gas price spikes of 2000-2001, the GAO said utilities have increased their use of hedging as a tool.

About 20% of the large and 32% of the small gas utilities surveyed by GAO prior to the 2000-2001 price hikes said they had not planned to hedge any of their gas supply. But 90% of the surveyed utility companies had changed their minds the following winter, and decided to hedge some portion of their gas supply, the GAO noted.

Setting up a test case, GAO determined that over an 11-year period, 1990-2001 the average price for winter gas by a utility that hedged, $2.57/MMBtu, was on target with one that went unhedged, $2.56/MMBtu. The difference was mainly in the reduced volatility in the hedged case, where consumers did not see wildly fluctuating prices.

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