M.J. Bradley & Associates LLC (MJB&A) provided technical and consulting support to the Task Force on Ensuring Stable Natural Gas Markets, convened jointly by the Bipartisan Policy Center and American Clean Skies Foundation. The Task Force was co-chaired by Gregory C. Staple, CEO American Clean Skies Foundation and Norm Szydlowski, Bipartisan Policy Center, and President & CEO SemGroup Corporation.
The Task Force sought to examine historical causes of price instability in natural gas markets and to explore potential remedies. The Task Force was unique because its members represented organizations across the entire natural gas value chain. Participants included natural gas producers, transporters and distributors, consumer groups and large industrial users, as well as independent experts, consumer advocates, state regulatory commissions and environmental groups. Over the course of five meetings and with the help of original commissioned research on several related topics, the Task Force examined the causes of past variability in natural gas prices and considered how recent shale gas discoveries and other, infrastructure-related developments affect the likelihood that similar price shocks might recur in the foreseeable future. The Task Force also developed a comprehensive set of recommendations aimed at bolstering consumer, policy maker and investor confidence in the stability of future gas markets and at improving the tools available for effective price risk management.
The research by MJB&A found that U.S. natural gas price volatility has been systematically higher than natural gas prices in most other markets including other non-energy commodities. Yet a twenty-year process of deregulation and market restructuring, together with robust supply and storage infrastructure, have provided market players with numerous financial and strategic hedging instruments. These instruments, combined with sensible policy to reinforce the strengths of the U.S. market, can minimize the negative economic impacts of price volatility and provide stability amidst increased reliance on natural gas.
The Task Force's key findings and recommendations included:
- Recent developments allowing for the economic extraction of natural gas from shale formations reduce the susceptibility of gas markets to price instability and provide an opportunity to expand the efficient use of natural gas in the United States.
- Government policy at the federal, state and municipal level should encourage and facilitate the development of domestic natural gas resources, subject to appropriate environmental safeguards. Balanced fiscal and regulatory policies will enable an increased supply of natural gas to be brought to market at more stable prices. Conversely, policies that discourage the development of domestic natural gas resources, that discourage demand, or that drive or mandate inelastic demand will disrupt the supply-demand balance, with adverse effects on the stability of natural gas prices and investment decisions by energy-intensive manufacturers.
- The efficient use of natural gas has the potential to reduce harmful air emissions, improve energy security, and increase operating rates and levels of capital investment in energy-intensive industries.
- Public and private policy makers should remove barriers to using a diverse portfolio of natural gas contracting structures and hedging options. Long-term contracts and hedging programs are valuable tools to manage natural gas price risk. Policies, including tax measures and accounting rules, that unnecessarily restrict the use or raise the costs of these risk management tools should be avoided.
- The National Association of Regulatory Utility Commissioners (NARUC) should consider the merits of diversified natural gas portfolios, including hedging and longer-term natural gas contracts, building on its 2005 resolution.
Specifically, NARUC should examine:
- Whether the current focus on shorter-term contracts, first-of-the-month pricing provisions and spot market prices supports the goal of enhancing price stability for end users,
- The pros and cons of long-term contracts for regulators, regulated utilities and their customers,
- The regulatory risk issues associated with long-term contracts and the issues of utility commission pre-approval of long-term contracts and the look-back risk for regulated entities, and
- State practices that limit or encourage long-term contracting.
- As the Commodity Futures Trading Commission (CFTC) implements financial reform legislation, including specifically Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Pub. L. 111-203), the CFTC should preserve the ability of natural gas end users to cost effectively utilize the derivatives markets to manage their commercial risk exposure. In addition, the CFTC should consider the potential impact of any new rulemaking on liquidity in the natural gas derivatives market, as reduced liquidity could have an adverse effect on natural gas price stability.
- Policy makers should recognize the important role of natural gas pipeline and storage infrastructure and existing import infrastructure in promoting stable gas prices. Policies to support the development of a fully functional and safe gas transmission and storage infrastructure both now and in the future, including streamlined regulatory approval and options for market-based rates for new storage in the United States, should be continued.
- Finally, regulators should be mindful of the lead time required for markets and market participants to adjust to new policies.
The full report is available here.