Consumers could be paying lower prices for natural gas as soon as this coming winter as a result of growing competition among pipeline companies and natural gas producers, industry officials and analysts said yesterday.
Experts said that industrywide deregulation and a sharp decline in the demand for natural gas have created a buyer's market that should cause the price of gas for the homeowner to drop by at least 5 percent.
"It's driving the price down. You'll see the bulk of the price decrease this winter," said Michael German, vice president for policy evaluation and analysis at the American Gas Association.
Signs of the trends driving the industry were evident this week. First, the Washington Gas Light Co. and Baltimore Gas and Electric Co. announced that they will begin to take on a third gas supplier beginning in 1987. In addition, one of the original suppliers, the Columbia Gas Transmission Corp., announced that it had offered to pay $800 million to its gas producers to change unfavorable contracts it had signed with the producers in the mid-1970s.
Under so-called "take-or-pay" contracts, pipeline companies are obligated to honor long-term contracts that require them to pay for gas at prices far above the market rate. Because the wellhead price of gas was regulated by the government at the time such contracts were signed, the only competitive advantage available to the pipeline companies was to agree to take a higher percentage of gas at the sale price, regardless of where the market price eventually went, industry analysts said.
Analysts said the risk was reasonable at the time, given the high demand for natural gas and the desire of the pipeline companies to secure a long-term supply. It didn't hurt that oil prices were projected to rise indefinitely.
"Gas encountered no real competition until 1981," said R. Gamble Baldwin, who follows the industry for First Boston Corp. "Regulation had imposed price ceilings on gas that were below those of electricity, oil and coal," he said.
Since the time many of the take-or-pay contracts were signed, the environment of the natural gas industry has changed significantly. In particular, analysts and officials said, conservation efforts, the unexpected decline of oil prices and deregulation have created a buyer's market.
"A lot more gas was found and offered to market than people expected," said the AGA's German. One of the principal results of this glut was an emergence in 1983 of a spot market of gas whose prices were significantly lower than the prices that the pipeline companies were locked into with their take-or-pay contracts.
It is this discrepancy that companies like Columbia are trying to bridge by renegotiating contracts so that the price can be periodically adjusted to market prices.
"The price we expected our gas would be sold for was still far below what we projected oil to go to," said William Chaddock, an executive with Columbia Gas Transmission. That market did not materialize, however. Chaddock said that in 1980 Columbia's customers told the company it would need 1.4 trillion cubic feet of gas, but only actually used 800 billion.
Under its current contracts with suppliers, Columbia is paying in the range of $6 to $7 for every thousand cubic feet, while gas sells on the spot market for about $2.50, Chaddock said. He said that in exchange for a cash payment the company hoped to negotiate the price of gas down to about $3. If the negotiations are successful, analysts said other companies caught in the take-or-pay squeeze would be spurred to complete similar negotiations with their suppliers. That, in turn, eventually could be passed on to the utilities that buy gas from the pipeline companies -- and hence eventually to consumers, officials said.
"The Columbia action of trying to buy out these take-or-pay contracts would have no immediate impact," said Paul Young, a spokesman for Washington Gas, which services 575,000 customers. Young said, however, that consumers ultimately would pay lower prices as a result of such measures.