The White House and Congress have pretty well shelved the decontrolling of natural gas prices in this election year, but the head of the federal gas regulatory agency is now seeking--on his own--to relax large segments of the controls.
At the instigation of its new chairman, C. M. (Mike) Butler, the Federal Energy Regulatory Commission shortly will propose a new rule that would lift the average price of all gas now flowing into the national distribution system by about a third.
The rule is a long way from being final, and even if FERC finally issues it, consumer groups will almost surely move to delay and defeat it in court. If put in place, it would cost consumers about $10 billion more for gas each year.
This rule would affect "old" gas, discovered before April, 1977. Old gas now makes up more than half of the gas in the system. Its average price likely would rise about two-thirds.
FERC also has proposed, with Reagan appointee Butler as the inspiration, a rule that would partially free the price of one kind of new gas: "near-deep" gas found between 10,000 and 15,000 feet underground.
Gas found deeper than that already is free of controls, on the theory that producers need a high price as an incentive to find it.
Congress partially decontrolled natural gas in the Carter administration, through the Natural Gas Policy Act of 1978. The theory was that it made no sense to hold gas prices down while oil and other energy prices were rising, that this would create artificial distortions in the marketplace, and that higher gas prices would provide incentives both to cut consumption and to increase production, lessening dependence on imported oil.
The NGPA was a compromise between those who wanted to lift controls entirely and those who wanted to preserve them on grounds that producers already were doing nicely and consumers ought not have to pay any more than before.
Under the act, new gas prices now are generally allowed to rise 4 percent more than inflation each year, and in 1985 they will be set totally free. Old gas prices are held about to the inflation rate now, and the law would continue this indefinitely. As old wells are depleted, however, this gas will be a shrinking share of total production.
President Reagan came to office pledged to speed up this compromise process of decontrol but has submitted no bill to do so, even though his own Cabinet council on natural resources has urged him to.
One reason he has hesitated is a lack of enthusiasm for further decontrol in Congress, even in the Republican Senate. The recession has been a deterrent, as are the forthcoming elections. And producers are not hurting. Average gas prices have nearly doubled since passage of the NGPA three years ago; they have gone up more than seven-fold since 1973.
Chairman James A. McClure (R-Idaho) of the Senate Energy Committee told the White House earlier this year it would have to send a bill to Congress before last week's recess to have any hope of passage this year. No bill was forthcoming.
A major oil company's expert said the industry had hoped Reagan would propose decontrol in his January State of the Union address or shortly thereafter. "Now we are regrouping for next year," he said.
At FERC, however, Butler is busily at work, and not simply in the name of producers, but to avoid what he says will otherwise be enormous distortions of the market when price controls come off new gas, but not old, in 1985.
First will come a huge one-time-only price spurt as new gas leaps to the so-called free market level. Then will come confusion, Butler says. Some gas prices will be quite high, some relatively low, and competing pipeline companies will have access to the high-priced and low-priced gas in widely varying amounts, depending on their suppliers.
Butler and others in favor of speeding up decontrol refer to this as a "market ordering" problem and say that those who are resisting decontrol have not faced up to it.
The chairman argues that ultimately, under the old-new two-tier pricing system, prices for new gas will be bid up well above the free market level, and that the average price of new gas and old will be about the same as if no controls remained.
"In our analysis, the consumer obtains no benefit from continuing price controls on part of the gas," he said.
Distributing companies with access to comfortable amounts of lower-cost old gas could afford to pay very high prices for the remaining amounts of new gas that they needed; their average price would still be within bounds.
But other companies might then end up less well off, Butler says. A pipeline with relatively little old gas could find itself forced to pay such a high price for so much new gas that it would begin to lose customers. Some users, particularly industrial customers able to use oil as an alternative fuel, would begin to switch because oil would be cheaper.
This multiple-price problem would be compounded by clauses in many current contracts under which, as soon as one producer in a region obtains a higher price, all producers there become entitled to it.
Butler said FERC has no power to deal with these contract clauses, which is one reason he wants Congress to face up to the decontrol issue. Since gas prices will be equally high under NGPA or full decontrol, in his opinion, Butler said, "What you have on your hands is an exercise in political damage control."
Since neither the president nor Congress seems anxious to plunge ahead, Butler is pressing his commission to increase prices of certain categories of gas under authority he says FERC has through the NGPA.
Last month, FERC published a proposed rule under which newly discovered gas found onshore and at depths between 10,000 and 15,000 feet could be sold for an "incentive" price equal to 150 percent of the price for most other new gas--about $4.50 per thousand cubic feet (mcf) instead of $3. NGPA says incentive pricing is in order if there are "extraordinary costs and risks" associated with finding and producing gas.
Butler thinks the existing rules are distorting drilling patterns because wells of less than 10,000 feet are relatively cheap to drill, while gas from wells deeper than 15,000 feet is uncontrolled and bringing up to $10 per mcf.
Gas in between has nothing comparable going for it. But Butler acknowledged that FERC must build a record in the current proceeding showing conclusively that an incentive price is needed.
Critics, such as Edwin Rothschild of Energy Action, an organization seeking to hold down energy prices, point to the great increase in drilling activity since passage of NGPA as ample evidence that no new incentives are necessary.
FERC also has the power under NGPA to increase the price of gas found before 1977 if it concludes that doing so is "just and reasonable."
That phrase comes from earlier legislation and was the key test of gas price control decisions made for years by the Federal Power Commission, the predecessor to FERC. Essentially, the FPC always took "just and reasonable" to be somehow related to the cost of finding and producing the gas, and federal courts upheld such a definition.
Soon FERC will propose a rule covering old gas that likely would have the effect of raising all of it to the highest price being paid for any of it. At present, some old gas sells for as little as about 25 cents per mcf, with the average at about $1.20.
Butler acknowledged that these two rulemakings are "testing the frontiers of the commission's authority." But he is going ahead because he sees a "substantial opportunity to rationalize the market by raising the price of flowing gas."
With the rules changes formally proposed, "the commission can begin collecting numbers under the court-blessed methodology used by the FPC and see what we come up with....If the facts bear out my theory, the commission might have the opportunity to eliminate much of that old gas cushion" that will allow some pipelines to pay so much more for decontrolled gas after 1985 under current law, Butler said.
Some intrastate pipelines, having no such old gas cushion because the prices they could pay were not regulated until passage of NGPA, are already complaining that they cannot compete with interstate pipelines for new gas. Some in Texas recently had to curtail shipments because they could not afford to buy gas available to them, they said.
If Butler and other administration analysts are right in saying users will get no benefit from controls after 1985, then continuing them would hardly make sense.
However, the rigidities of the natural gas marketplace are such--gas is the only commodity of any consequence to which a transportation company takes title when it picks it up and then sells it to someone else, a distribution company, for resale--that average gas prices might still remain below the full-decontrol level, some energy economists point out.
In that case, consumers still would benefit. Presumably this, too, will be argued in the FERC proceedings Butler has touched off.