Natural Gas Supplies Were Constrained because of Low Storage Levels and Delays in Newly Produced Gas Reaching the Market

Based on our analysis of EIA data and interviews with EIA and other energy analysts, constrained natural gas supplies, caused by unusually low levels of gas in storage on the part of gas utilities and gas marketers, and the considerable time required for gas from new production to reach the marketplace, contributed to the increases in natural gas prices in 2000- 2001. Natural Gas Market Supply and Demand Characteristics Cause Price Spikes

Natural gas price volatility, as occurred during the winter of 2000-2001, is driven by inelastic supply and demand, which means neither can quickly nor easily adjust to meet changes in the natural gas market. FERC staff found that published natural gas price data are susceptible to manipulation and cannot be independently validated. In addition, CTFC—the federal agency responsible for fostering competitive commodity futures markets—generally does not have regulatory authority over trading in the OTC derivatives markets. However, until CFTC’s investigation is complete, it is unknown, what role, if any, these markets may have played in the 2000-2001 natural gas price spike, or what, if any, enforcement or other actions may result. Hedging does not, however, ensure that a utility company will pay the lowest possible price for future natural gas purchases: it simply provides stable gas prices and protection against price spikes such as the one that occurred in 2000-2001. This recent price spike increased the importance of price stability for those gas utilities that serve residential customers and the regulatory agencies that oversee this service. According to our survey of state regulatory agencies, most allow the gas utilities under their jurisdiction to use hedging techniques when they purchase gas for their residential customers. However, at this date, the federal government faces major challenges in meeting its role of ensuring that natural gas prices are determined by supply and demand factors in a competitive and informed marketplace. FERC recognizes that it needs to improve its market oversight and is reviewing its statutory authority and market monitoring tools. VI), and noted that it previously lacked an adequate regulatory and oversight approach to monitor a restructured natural gas industry. Appendix I: Objectives, Scope, and Methodology

In our study of the natural gas market, we addressed (1) the factors that influence price volatility and, in particular, the high prices that occurred during the winter of 2000-2001; (2) the federal government’s role in ensuring that natural gas prices are determined in a competitive and informed marketplace; and (3) choices available to gas utility companies that want to mitigate the effects of future price spikes on their residential gas customers.
Why GAO Did This Study

During the winter of 2000-2001, the wholesale price of natural gas peaked at a level four times greater than its usual level. Responding to the congressional interest and concern caused by these high prices, GAO undertook a study to address the (1) factors that influence natural gas price volatility and the high prices of 2000-2001; (2) federal government's role in ensuring that natural gas prices are determined in a competitive, informed marketplace; and (3) choices available to gas utility companies that want to mitigate the effects of price spikes on their residential customers. GAO surveyed a nationwide sample of gas utilities and staff of state utility regulatory agencies.

What GAO Found

Price spikes occur periodically in natural gas markets because supplies cannot quickly adjust to demand changes. In 2000-2001 for example, natural gas supplies were constrained and demand skyrocketed, leading to the perfect environment for the price spike shown below. While market forces make natural gas prices susceptible to price volatility, investigations are underway to determine if natural gas prices were manipulated in the Western United States during the winter of 2000-2001. Federal agencies face major challenges in ensuring that natural gas prices are determined in a competitive and informed marketplace. The Federal Energy Regulatory Commission lacks an adequate regulatory and oversight approach and is reviewing its statutory authority and market monitoring tools. The Commodity Futures Trading Commission does not have regulatory authority for over-the-counter derivatives markets. It does have antimanipulation authority and is currently investigating what role, if any, these markets played in the natural gas price spike of 2000-2001. Finally, the Energy Information Administration has an outdated natural gas data collection program, but has made efforts to reassess its data needs to provide more useful information. Gas utility companies can protect their residential customers against price spikes such as the one that occurred in 2000-2001. For example, using various hedging techniques, utilities can lock in prices for future gas purchases. Continuing volatility in natural gas prices, especially the price spike of 2000-2001, has increased the importance of price stability for gas utility companies. Agencies that commented on this report generally agreed with its conclusions.