Lautenschlager: Natural Gas Market Needs Regulation
By Brian E. Clark
Wisconsin utilities are not to blame for this winter's significant increases in natural gas prices, state Attorney General Peg Lautenschlager said Tuesday in an interview with WisBusiness.com.
Instead, it is all-but-invisible and unregulated commodities traders who are manipulating the cost of the fuel, she said.
And while mandating transparency in the financial markets for natural gas might not make prices for the fuel drop overnight, they are a necessary first step to understanding what effect traders have on upward march in the price of natural gas, Lautenschlager testified Tuesday in Washington, D.C.
WisBusiness.com editor Brian Clark interviewed Lautenschlager by phone as she prepared to fly back to Wisconsin after testifying before the U.S. Senate Judiciary Committee.
Brian Clark: Can you summarize what you said [today]?
Peg Lautenschlager: Our concern is that even though supply and demand have been relatively constant and demand has actually gone down in three of the last five years the volatility of the market and the upward trend of the natural gas market cannot be justified by a supply and demand explanation.
Clark: Then what has caused the increases?
Lautenschlager: Well, one of the biggest concerns is that 80 percent of the commodities traded in natural gas are done in an opaque way so there is no accounting for the transactions.
In most commodities markets, excluding energy markets, traders must be registered and the trades must be recorded. In the energy market, no such requirements are had. As a result, more than 80 percent of the trades in the natural gas market are done by unregistered traders in unrecorded trades.
That contributes to the volatility because speculators can come in and drive prices up. And that happens in situations like cold winters and with Hurricane Katrina and the like. ...
Clark: What do you want Congress to do?
Lautenschlager: On behalf of the four Midwest attorneys general who issued the natural gas report last week, I asked Congress to look at requiring registration of natural gas traders and recording of trades made in this market.
That would afford us an opportunity to look at the market and see what is driving it upward.
Clark: Was the panel receptive to that notion?
Lautenschlager: Absolutely. Sen. Arlen Specter, R-Pennsylvania, has a bill which is addressing involving what are almost monopolistic practices and control of the natural gas market by large conglomerates.
Sen. Dianne Feinstein, D-Calif., has proposed an amendment would require that electronic traders be registered and that those trades be recorded. That would be a great first step from our perspective. Her amendment, frankly, responds directly to the concerns we have raised.
Clark: Is there anything that can be done here in Wisconsin?
Lautenschlager: The volatility of the market is obviously a problem. The Public Service Commission can help by demanding that this resource be more publicly traded.
Clark: Is there anything the Federal Energy Regulatory Commission can do at this point?
Lautenschlager: There are a variety of regulatory bodies that can do things at the federal level. We would like them to request that natural gas traders be registered and that trades be recorded.
Until we get a grasp of what is happening in the commodity markets for natural gas, it is hard to propose any solutions because how do you solve a problem that you can't see?
We know the problem exists because we have seen the prices ratcheting up with big spikes and then they come downward a little less and they ratchet up steadily.
We also know it can't be explained by supply and demand as the industry has tried to do. Nonetheless, without being able to view what is happening in the market, it is hard to offer solutions. So step No. 1 and a partial solution is registration and recording to get rid of the behind-closed-doors trading that's been going on.
Clark: Is the Bush administration supportive?
Lautenschlager: It is hard to say. But Sen. Specter seemed incredibly receptive today. ...
Clark: Was the winter heating season as bad as predicted?
Lautenschlager: It was better than expected and Wisconsin consumers are maybe going to get some relief. But what we are seeing is that heating bills went up about $250 per family in the Midwest, which increases them by about $600 per year per family over the past five years. So it is having a significant impact.
Wisconsin's Legislature had to be called into special session to deal with the high cost of heating a home. As I recall, about 20,000 more Wisconsin families were behind in paying their utility bills last month than last year. Clearly it is having an impact not only on families, but on businesses and agriculture as well.
Clark: Do you think that price spikes will be the norm for winters in the near future?
Lautenschlager: I think we are seeing spikes that are caused by a variety of reasons, but they all seemed to be tied to the volume of trading in natural gas. As a result of that, we know that we really need to get a handle on what trading is being done.
Clark: If this is a global problem and the U.S. requires transparency in trading, will it help solve the problem?
Lautenschlager: The gasoline issue is more global than natural gas. Clearly there are countries that are starting to develop that have a demand for natural gas. But the U.S. market is where the bulk of the action is happening. So regulating within our own boundaries would be a big first step.
Clark: Do you think energy companies have been gouging customers or are they just passing the costs on?
Lautenschlager: If you mean Wisconsin's utilities, they aren't involved in this. They are just passing through the increased costs to their customers. Utilities do not have a role to play in the increased cost of natural gas.
It is the commodity market and the natural gas producers where we need to be able to take a closer look.
Clark: Is there transparency among producers?
Lautenschlager: Essentially, the commodities market is regulated if you are a pork belly, orange juice or soybean trader. But energy was exempted from registration and recording requirements in 2000. As a result, much of the trading of natural gas takes place behind closed doors.
Clark: Why was that done?
Lautenschlager: You are asking the wrong person.
Clark: Did the hurricanes have some effect on the supply of natural gas?
Lautenschlager: Not really. The hurricanes minimized the supply of natural gas by about 5 percent. But on the other hand, the demand was cut because there were fewer industries working. So it has just about a 2 percent impact on the market.
Clark: What is next for you to push this issue?
Lautenschlager: I will be working with my colleagues in Iowa, Illinois and Missouri in a variety of areas, including with the regulatory commissions and putting pressure on members of Congress from our own areas regarding the Feinstein amendment.