NGI The Weekly Gas Market Report
Recognizing that energy consumers are likely to experience priceshocks for natural gas, electricity and heating oil this winter,Senate and House lawmakers last week began calling on Congress andthe Clinton administration to work cooperatively to open up morepublic lands to exploration and drilling, provide tax incentivesfor producers (especially marginal well operators) and to consideroptions that would make a broader mix of fuels (other than naturalgas) attractive to the electric generation market.
Much of the rhetoric had the look and feel of last minuteelectioneering. Congress only has about a week left before itadjourns 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 pushthrough a package of energy initiatives, sponsored by Sen. FrankMurkowski (R-AK). Even if Capitol Hill were to act, the effect ofits measures wouldn’t be felt in time for this winter. It doesprovide some indication, however, of directions a new Congressmight take, particularly if the dire warnings come true by the timeit convenes in mid-January.
Offering lawmakers some real-world advice, FERC Chairman JamesJ. Hoecker proposed several measures to “ameliorate” the effects ofnatural gas price volatility this winter. He called on LDCs toaccent hedging techniques and long-term contracts, on stateregulators to make greater use of rate design and stabilizationtools and to closely oversee LDC purchasing practices, and onfederal and state governments to support energy assistance andweatherization programs to aid low-income customers.
He cited some long-term solutions as well, such as a gaspipeline from Alaska and energy efficiency measures, but thesearen’t going to “heat people’s houses and…..cook their food” thiswinter, Hoecker told the House Energy and Power Subcommittee duringa hearing last Thursday.
“The prospect of higher prices this winter for natural gas is amatter of serious concern for businesses and consumers. I do notminimize the consequences for our citizens of today’s price anddeliverability issues, especially if our winter weather isextreme,” he said. However, he cautioned that regulatory and policyresponses to the situation should be “measured and balanced inrecognition of the fact that the fundamental structure ofinterstate natural gas markets is sound.”
Within the boundaries of its jurisdiction, “the Commission isworking hard to ensure that there is adequate pipelineinfrastructure available at fair prices,” Hoecker said, adding thatFERC has authorized 6,000 miles of new pipeline facilities over thepast three years.
Congressional policies have created a “transportation platformfor [a] well-functioning commodity market.” This has resulted in”significant benefits” for gas consumers over the past years, someof which “have come at the cost of [a] downturn in drilling.” Thefact that gas producers already have stepped up exploration anddrilling efforts in response to higher gas prices “is evidence ofa functioning market,” Hoecker assured lawmakers.
But Chairman Murkowski of the Senate Energy and NaturalResources Committee didn’t see gas as a well-functioning market,especially as consumers face the prospect of 50% higher bills thiswinter. The “pressure’s going to be on natural gas [thiswinter]…..That’s where the next train wreck is coming,” he saidduring a committee oversight hearing on the winter fuel outlooklast Tuesday.
“We’re already too late” to be much help to gas consumers thiswinter, Murkowski said. He estimated about 50% of the households inthe United States use gas as a home-heating fuel, and about 14% ofutilities depend on gas to generate electricity. This stepped-updemand is squeezing supply. “We’re using now for the first time ourgas reserves faster than we’re finding new reserves.”
Alluding to President Clinton’s release of crude oil from theStrategic Petroleum Reserve (SPR) to mitigate heating oil pricesthis winter, Murkowski asked Energy Secretary Bill Richardsonwhether the administration had anything up its sleeve to rein innatural gas prices as the industry enters the winter heatingseason. “There’s no SPR for natural gas,” he reminded Richardson.
Sen. Pete Domenici (R-NM) predicted the “next crisis for Americaunequivocally will be [that] we don’t have enough natural gas,” andit will likely occur this year – if it hasn’t begun already. Thegas industry has assured consumers, however, that supply will besufficient to meet demand this winter. Domenici warned gasconsumers to “hold onto your pocketbooks because [you] ain’t seennothing yet” with respect to gas prices, which he believes will go”through the roof.”
He blamed Department of Interior (DOI) policies that restrictexploration and drilling on public lands, and EnvironmentalProtection Agency (EPA) rules and regulations that favor gas overcoal in electric generation for contributing to the supplyimbalance affecting natural gas.
Contrary to popular belief, the “energy policy of the UnitedStates is made by [the] Interior Department” rather than theDepartment of Energy (DOE) “because they determine what lands canbe entered for drilling for oil and gas,” Domenici said. The EPAalso 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 to1983. Also, EPA emissions rules have made it nearly impossible toconstruct generation facilities that aren’t fueled by natural gas,he noted, adding that it’s been 10-20 years since a new coal-firedfacility was built.
So “we are hell-bent to use natural gas…..We’re limitingAmerica to that kind of energy [gas]” rather than a broad-based mixof sources, Domenici noted. He and other lawmakers believe thatrestricting much of the electric generation market to a single fuel(gas) is a dangerous policy, and that action should be taken toreverse this trend.
Texas Railroad Commissioner Charles R. Matthews warned againstover-reaction. “I do not believe we should change the demand sideof the equation with price controls or other governmentalintervention.” Instead, “we need to make changes to [the] supplyside” by formulating polices that favor tax incentives forproducers, reopening training programs for oilfield workers anddeveloping new recovery technologies. “We [in Texas] have a recordof proving…..that tax incentives do work.”
But Byron Lee Harris, deputy director of the West VirginiaConsumer Advocate Division of the Public Service Commission,supports rate controls. “As the result of the rate caps that wehave in place, approximately 85% of natural gas customers [in WestVirginia] will not experience an increase in their rates thiswinter, which has been estimated to be an $82 million savings.”
But given the high level of natural gas prices now, he advisedother state regulators not to pursue “absolute” rate freezes as away 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 tocapture potential price declines.”
There was a lot of finger-pointing during the Senate and Househearings as to who was at fault for the “energy supply trainwreck…..on the horizon,” as Murkowski called it. He accused theClinton administration of being “asleep” at the wheel. The fact theadministration had to tap the SPR this early “clearly” sends themessage to the U.S. public that “we’re in trouble. We’re now havingto go into our savings accounts.”
Specifically, Senate and House Republicans rapped administrationpolicies 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 theelectric generation market. The also cited the administration’sfailure to develop a national energy policy.
Democrat lawmakers, as well as Richardson, countered with theirown laundry list of energy shortcomings of the congressionalRepublican majority. Topping the list was the failure to passelectricity restructuring legislation and the administration’spackage of tax incentives for marginal oil and gasproduction/renewable energy sources, and reauthorization of theSPR.
Sen. Tim Johnson (D-SD) summed it up: “I, for one, don’t believeeither political party has particularly distinguished itself onenergy strategy for a long, long time.”
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