Federal Energy Regulators See Market Forces Behind Shale Gas ‘New Paradigm’

During last week’s regular open meeting, staff with the Federal Energy Regulatory Commission presented their 2009 State of the Markets Report, and the outcome for energy consumers was profound.  Prices for natural gas were down by 50 percent across the country, and as a result electricity rates declined proportionately in the organized competitive markets, where gas is a key generation fuel. Costs for both natural gas and electricity were at the lowest levels seen since at least 2002 – even earlier in some regions, FERC staff reported.

FERC Chairman Jon Wellinghoff hailed the “new natural gas paradigm” resulting from the advent of shale gas production and the extensive pipeline infrastructure network abetted by FERC.  As a result, regional price differentials for gas are disappearing and consumers now face the prospect of enjoying “one market” across the U.S. for gas, Wellinghoff said.

Commissioner Marc Spitzer credited market forces for spurring the “technological innovation” making production of natural gas from shale geologic formations possible.  Rising natural gas prices reflecting increasing demand and diminishing supply from conventional gas reserves provided the impetus for the technological innovation underlying the rising production from unconventional shale plays. The resulting increase in supply is benefitting electricity ratepayers, Spitzer noted.

The state of the markets for consumers in 2009 was “extraordinary,” declared Commissioner Philip Moeller. The seventh slide in the staff’s presentation – which showed wholesale electricity prices nationally decreased on average by 50 percent and prices in the New York and New England markets were the lowest since their inceptions in 1999 and 2003 – “should be plastered on the sides of buildings,” Moeller said, lauding 2009 as a successful year for the competitive wholesale electricity markets FERC regulates.

FERC’s newest commissioner, John Norris, elicited from staff an explanation for why state-regulated retail price decreases will lag those seen in the wholesale power markets that FERC oversees.  Retail electricity supplies are procured under longer-term contracts to protect consumers from exposure to volatility in the spot markets, staff explained.  Therefore, the retail consumer benefits will accrue over time as those contracts expire and new retail supply agreements at lower costs are entered into, staff explained.

The FERC commissioners pondered how to translate the “new paradigm” in natural gas to electricity.  Certainly, in terms of price, that is already occurring to the tremendous extent power prices in the competitive markets reflect underlying fuel prices.  Fundamentally, the best course of action for FERC is to stay the course in its pro-competition policies, which are delivering tangible economic, environmental and reliability benefits to consumers.  Allowing market forces to work, and avoiding the temptation to pick technological winners and losers or to otherwise intervene in the well-functioning markets to force particular outcomes, will spur tremendous technological innovation for the benefit of consumers.

Electricity markets are on the cusp of a technological tsunami as new smart grid and smart meter technologies ignite the sector along the lines of what we witnessed from competition in the telecommunications industry.  Let the markets work.  Allow prices to rise and fall according to neutral market forces and FERC staff should continue to deliver “extraordinary” state of the markets reports in the years to come. Joel Malina | April 20, 2010