After years of dealing with raising natural gas prices, federal energy regulators last week confronted a staff proposal to lower the price of certain types of high cost gas--and flinched.
With gas supplies now plentiful and pipeline companies unwilling to pay as much as they once did for the high-cost gas, the Federal Energy Regulatory Commission staff proposed changing the formula that determines those prices, allowing them to move up and down with market demand.
But FERC Chairman C. M. (Mike) Butler III, an ardent advocate of allowing gas prices to rise when demand is rising, pulled the item off the agenda.
"Rather than do things piecemeal, the chairman decided to put natural gas issues on the back burner," said Rachelle Patterson, spokeswoman for the FERC. According to Patterson, Butler was reluctant to act in the face of rapidly changing market conditions and hoped that the White House and Congress would resolve the future of natural gas prices.
"Of course, the fact that producers were jumping out the windows in Houston didn't have anything to do with it," one FERC official said wryly.
Butler's decision was the latest step in the slow and intricate dance of natural gas regulation. Earlier this year, Butler seemed committed to allowing higher prices for certain categories of natural gas, a move that generated widespread consumer protests and congressional hand-wringing. However, he soon found he lacked support among the other commissioners to run as far and as fast as he wanted.
Instead of taking a series of concrete actions allowing higher prices, the FERC stopped with a notice of inquiry, soliciting comments on what might be done. Those comments are due late in August. Senate Energy and Natural Resources Committee Chairman James A. McClure has said that Congress will not move without a clear signal from the administration, which is in no hurry to act before this fall's elections.
Meanwhile, natural gas is turning into a buyers' market. Slowdowns in industrial activity and construction have reduced demand for natural gas, creating oversupply in some areas. And declining fuel oil prices are pushing down on gas prices as well.
The most recent incident followed decisions by several pipeline companies to cancel contracts to purchase high-cost gas from geological formations called tight sands. The FERC has set higher-than-average prices on this gas because of the expense and difficulty of extracting it.
Two pipeline companies, Transco Companies and American Natural Resources Inc., exercised provisions that allowed them to cancel contracts with producers, and Columbia Transmission Systems, which supplies most of the gas in this area, gave notice nearly a year ago that it would not buy the highest priced gas.
In response, the FERC staff proposed to tie "incentive prices" for gas produced from tight sand formations to market prices for crude oil rather than to the cost of production.
The proposal would have cut the price of gas from tight sands from approximately $5.28 per thousand cubic feet to between about $3.50 and $3.65 but probably would have been applied only to new wells.