Natural Gas:

Roles of Federal and State Regulators in Overseeing Prices

GAO-06-968: Published: Sep 8, 2006. Publicly Released: Oct 17, 2006.

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Following Hurricanes Katrina and Rita, natural gas prices spiked to more than $15 per thousand cubic feet, nearly seven times higher than in the late 1990s. As a result, policymakers have increasingly focused on better understanding how prices are overseen. The prices that consumers pay for natural gas are composed of (1) the commodity price, (2) the cost of interstate transportation, and (3) local distribution charges. Oversight of these components belongs to the federal government, through the Federal Energy Regulatory Commission (FERC), and the states. In 1993, federal price controls over commodity prices were removed, but FERC is still charged with ensuring that prices are fair. Recently, the Energy Policy Act of 2005 (EPAct 2005) broadened FERC's authority. GAO agreed to (1) analyze FERC's role overseeing natural gas prices, (2) summarize FERC's progress in implementing EPAct 2005, and (3) examine states' role in overseeing natural gas prices. In preparing this report, GAO met with officials from 10 states that regulate gas in different ways and analyzed relevant laws and documentation.

Since natural gas commodity prices were deregulated in 1993, FERC's role in ensuring that commodity prices are determined competitively and are free from manipulation has been limited to (1) indirectly monitoring commodity markets to identify and punish market manipulation and (2) supporting competition in those markets. FERC faces challenges ensuring prices are fair, however, because staff cannot monitor all of the potentially millions of transactions and because it is difficult to identify market manipulation. FERC's oversight of commodity markets has risen in importance recently because the commodity price amounted to nearly 60 percent of the total consumer price in 2005 compared with about 30 percent in 1993. FERC also directly approves interstate transportation prices. FERC has completed action on four of the six new tasks identified by EPAct 2005 related to natural gas. FERC officials said that EPAct 2005 has achieved tangible results. For example, following FERC's issuance of a policy statement on enforcement in October 2005, some industry members have self-reported instances of noncompliance with FERC-approved rules in an effort to gain consideration for a lesser penalty. States directly oversee prices for local distribution of natural gas and have a limited role approving commodity and interstate transportation prices. States directly approve utilities' charges for local delivery of natural gas, but this represented only about 30 percent of the consumer price in 2005. While states can deny gas utilities from passing on the cost of the gas commodity to consumers, state officials told us this rarely occurs. State officials rely on FERC to ensure that commodity prices are fair, but some said they are unaware of FERC's oversight efforts. FERC officials agree that expanding the information they provide to stakeholders would improve stakeholders' understanding of FERC's efforts and could help deter manipulation.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: FERC has taken several steps to provide more information on its oversight activities related to natural gas markets. As noted in the language of our recommendation, because this information could be used by would-be market manipulators, FERC was provided initial discretion in how best to improve the information it provides to stakeholders. Using this discretion, FERC has taken several key steps, namely: issued 2 orders (#710 & 720) providing increased transparency, convened an enforcement conference with stakeholders where it discussed its oversight roles, issued a white paper describing its roles and actions, increased the information it provides in its annual reports to include descriptions of number of investigations begun during the year (and resolution) along with a discussion of its investigative processes, and finally it also issued an order that authorizes disclosure of investigations that have been initiated by FERC after the subject has had an initial opportunity to respond to the preliminary findings letter. In total, these actions provide a sound basis for closure of this recommendation and have led to increased transparency regarding the oversight of natural gas markets.

    Recommendation: Given the potential benefits of providing more information on its oversight activities, the Chairman of FERC should provide more information to stakeholders, including state regulators, other government officials, and the public, about actions taken by FERC to ensure that natural gas prices are fair. This effort should be undertaken within existing law and regulation, build upon the efforts that FERC already has under way, and use the information FERC already compiles on its monitoring and investigations. We agree that disclosure of information that is specific or detailed could provide would-be market manipulators with information about FERC's sources and methods of operation. Therefore, we believe it prudent that the Chairman have initial discretion on how best to do this. The information we recommend that the Chairman consider providing to stakeholders, including state regulators and, where possible, the public, includes information on how the Office of Enforcement staff analyze natural gas markets and how the staff go about identifying market anomalies or unusual market behavior; information on the types of unusual market behavior that warrant further investigation by the Office of Enforcement; and, more timely information on the informal and formal investigations under way, such as the numbers and subject areas but not the identities of those under investigation.

    Agency Affected: Federal Energy Regulatory Commission


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