Can Sunshine Lower Sky-high Gas Prices?
Gov. Newsom and lawmakers think transparency can lower gas prices on the pump. What about transparency for the worth of natural gas?
Calls are growing for more transparency in California’s energy markets. Gov. Gavin Newsom just signed his bill shining a lightweight on gas prices on the pump. But in terms of the recent surge in natural gas prices that jolted electricity and gas bills this winter, the subsequent step is murkier. Regulators on the California Public Utilities Commission say they’ve opened an investigation. And Gov. Newsom has formally requested the Federal Energy Regulatory Commission achieve this too. I asked Prof. William Boyd, faculty co-director of the Emmett Institute, to elucidate the regulatory options. Here’s our conversation, edited for brevity and clarity. We began with how natural gas prices are determined…
The issue with natural gas pricing is that it’s not transparent. The wholesale spot market price for natural gas is often tied to cost indexes which are created by third-party price reporting agencies owned by private firms. They essentially call around and ask gas traders what they’re buying and selling gas for at a selected hub, they usually use that to construct a price index that becomes the pricing term within the contracts for natural gas within the wholesale and retail markets.
Why is the CPUC investigating when it doesn’t regulate natural gas producers?
The priority is that California consumers–residential, business, industrial, and industrial consumers, including power plants that burn natural gas to generate electricity–are all paying inflated prices for natural gas. So, their retail prices, which are regulated by the CPUC, is perhaps inflated in the event that they are based on inflated wholesale prices of natural gas. I feel the CPUC and Gov. Newsom are probably correct to ask, ‘Was there potential manipulation of those price indexes?’ on condition that we just experienced a moment of utmost demand in addition to high volatility available in the market.
What can the Federal Energy Regulatory Commission do?
FERC has an obligation to look at downstream effects of costs within the wholesale markets and an obligation to make sure that is all “just and reasonable.” But FERC has its own challenges, since it’s made a policy decision to essentially defer to the price-reporting agencies in terms of wholesale gas prices. I feel this begs the query, “How can FERC possibly know if these prices are only and reasonable if it doesn’t understand the main points of those indexes?” At a minimum FERC needs to know significantly better on an ongoing basis how these indexes are being constructed. I’d argue that FERC could also use its authority under the Natural Gas Index to create a public index if it finds that there are problems with the present set-up.
How would that work?
This goes all of the back to the California Energy Crisis of 2000-2001. Back then when California electricity prices and natural gas prices went through the roof and the entire California market experiment in electricity imploded–there was manipulation from Enron and others and an entire bunch of problems with market design–but considered one of the massive problems was that misreporting, or false reporting, to the worth indexes by the natural gas traders was (within the words of FERC) “epidemic.” Individuals who trade natural gas were mainly lying to the index publishers, driving those indexes up, which then benefited other downstream transactions they’d priced at index. Congress got here in and checked out this in and gave recent powers under the Natural Gas Act to FERC to enhance price transparency and liquidity within the natural gas markets. FERC has the facility to intervene and create its own price index if it finds that the present indexes should not getting the job done, but it surely’s never made that finding and never moved within the direction of a public index. But with all of the volatility in natural gas markets and given how tightly coupled the natural gas and electricity markets are, possibly FERC should consider experimenting with a public index at hubs where there’s little or no reporting happening and see the way it goes. Wanting that, FERC could move to require more information from those firms which are reporting to the index publishers and lift a broader set of questions and concerns about these ways of price making. That is, incidentally, the exact same form of problem that we saw with the London Interbank Offered Rate or LIBOR after the financial crisis. Because these benchmark prices are so vital to the broader economy—that’s, they’re “systemically significant” because they affect pricing in all varieties of other transactions—regulators should be paying close attention.
Do you see a trend with Gov. Newsom’s oil law and these separate calls for more transparency around natural gas prices?
I sure hope so. As people recognize that prices should not just the product of supply and demand alone, it’s really vital to know how those prices are made in specific markets to find out whether or not they’re fair. There are specific devices and ways of price-making which are at the guts of those markets that sometimes can turn into out-of-whack or can turn into objects of manipulation and we should be paying close attention to that, particularly if the costs that result are these sorts of systemically significant prices that may ripple through the economy and particularly after they involve prices for primary social goods that individuals can’t live without – these are necessities.
