Natural Gas Pains
Few Americans -- aside from those who regularly peruse obscure trade journals -- have taken notice of a pair of significant recent events in the natural gas industry.
On July 10, for the second time in less than a month, Federal Reserve Board Chairman Alan Greenspan warned Congress that a shortage of natural gas and rising prices were threatening gas-dependent enterprises such as the chemical industry and might make some U.S. industries uncompetitive. Two days after his first trip to the Hill, on June 12, Platts, the privately owned publication of record for the energy industry, set out strict new data-reporting rules for energy companies.
Looking at those two events in tandem tells us a lot. First: Greenspan. The chairman told Congress the U.S. is suffering a supply/demand gap in natural gas. Supply, it seems, is losing the battle, causing prices to skyrocket and triggering new worries about this still shaky economy.
Natural gas prices today are 100 percent higher than this time last year. And while they were high last winter, it was because of brutal weather. Prices are up now because of an apparent shortage of supply, with inventories 29 percent below their five-year average. By this winter, the National Association of Manufacturers (NAM) expects prices to hit $7 per 1 million British thermal units. The price in the '90s was mostly in the $2 to $3 range. With prices on the rise, Americans can expect to pay more for a vast range of consumer products -- the telecom, computer, and auto industries all rely on natural gas -- and, when cold weather rolls around this autumn, we'll all be shelling out more for home heating.
What Greenspan didn't mention is this: Thanks to the myriad natural gas pricing and volume frauds foisted on the public during the past two years, it's now pretty much impossible to tell how much gas is out there or what it should cost.
That brings us to Platts, which is regarded as the Dow Jones Index of the energy biz, the bible of gas trade. Platts, which is owned by McGraw Hill, depends on energy companies to provide it with accurate information about the amount of natural gas they have in storage tanks, pipelines and in the ground. But Platts has already told the California state senate it doesn't believe the figures it's getting from energy companies, and since July 1 has required companies to certify "the accuracy and completeness" of the data they submit.
The story behind the Platts move is not about some minor accounting dust up. It suggests that we haven't seen the last of the book-cooking scandals that have swirled around the multi-billion dollar natural gas industry since federal authorities deregulated the business in the 1990s. Today the industry operates in about as friendly an environment as it could want -- friendly for the execs, that is, not for us. Most government controls have been jettisoned. Most remaining regulation relates to the transportation and distribution of product. The feds no longer regulate or validate prices, leaving the job up to private firms like Platts -- private firms that obviously don't trust the energy corps to tell the truth and can't punish them if they lie.
This regulatory vacuum has fostered a casino mentality among energy execs. During the past two years, a slew of the nation's biggest energy companies -- including Dynegy, American Electric Power, CMS Energy Corp., El Paso, and the Williams Companies -- have admitted to falsifying data, apparently in hopes of snaring bigger profits.
And let's not forget Dynegy's nifty little gas exploration scam. In September 2002, Dynegy agreed to pay a $3 million fine to resolve Securities and Exchange Commission (SEC) findings that the company artificially inflated revenue, earnings and cash flow figures it reported to investigators.
One of the issues in the SEC investigation of Dynegy, according to the Wall Street Journal, was Project Alpha. Company executives -- including its former chief financial officer -- falsely claimed that the project's purpose was to ensure a stable supply of gas. The SEC settlement says the April 2001 operation was primarily meant to reduce taxes and boost cash flow, a crucial measure of a company's financial soundness.
As he prepared his Congressional testimony on natural gas, one wonders if Chairman Greenspan was concerned that his facts might be tainted by false data offered by an army of corporate Pinocchios. Because our government encourages dishonesty in the pursuit of profit, that question should concern us all.
Freelance writer James A. Thompson is a former Wall Street Journal staffer and employee of the federal Commodity Futures Trading Commission.