FERC’s Role in Influencing Prices That Consumers Pay for Natural Gas Has Been Limited

Since natural gas commodity prices were deregulated in 1993, FERC’s role  ensuring that the price consumers pay for natural gas is fair has been  twofold and limited. First, FERC has an indirect role overseeing the  market that determines commodity prices, with activities generally limited  to monitoring the market to identify and punish market manipulation  while supporting the development of competition. Second, FERC directly approves rates that determine  interstate transportation prices. Since Deregulation, FERC Has Had a Limited, Indirect Role Overseeing Natural Gas Commodity Prices

In carrying out its responsibilities to help ensure that natural gas  commodity prices in deregulated markets are competitive and free from  manipulation, FERC’s Office of Enforcement polices wholesale natural gas  commodity markets for manipulation. As shown in figure 2, real  natural gas commodity prices accounted for almost 60 percent of the total  consumer price in 2005, compared with about 30 percent in 1993. The officials said that, even after  increasing the number of staff working in the Office of Enforcement  dedicated to market monitoring, they are still not able to examine all of  the potentially millions of transactions that occur in numerous physical  and financial markets. EPAct 2005 identified six actions for FERC related to natural gas or  natural gas markets. 3 in table 1). Specifically, Office of Enforcement  officials noted that following the issuance of FERC’s Policy Statement on  Enforcement in October 2005, which explained the new market  manipulation rules and higher penalties, some industry members have self  reported instances of noncompliance with FERC-approved rules in an  effort to gain FERC’s consideration for a lesser penalty. States Directly Oversee Utilities’ Prices for Local Distribution of Gas, but They Have a Limited Role in Natural Gas Commodity and Transportation Prices

States directly oversee the prices utilities charge for local distribution of  natural gas but have only a limited role approving natural gas commodity  and interstate transportation prices. FERC officials  acknowledged that providing some additional information would increase  stakeholders’ understanding of FERC’s oversight of natural gas and help  deter market manipulation. States can deny utilities from recovering the costs of  these purchases from consumers if the costs of the gas purchases do not  reflect fair market prices; however, regulators in states we reviewed told  us this rarely occurs. As a result,  according to the state regulators and other experts we interviewed, the  states must rely on FERC to monitor commodity markets and ensure  prices are fair. Stakeholders, including state regulators, other government  officials, and the public, are highly affected by the commodity markets  that FERC is charged with overseeing, but some of these stakeholders  remain largely unaware of FERC’s oversight processes and activities. In  providing even more information to stakeholders on its oversight efforts,  including information, as appropriate, about ongoing monitoring and  investigation activities, FERC could both increase stakeholders’  understanding about FERC’s efforts to ensure the fairness of natural gas  prices and better deter market manipulation.
Why GAO Did This Study

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.

What GAO Found

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.